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Copyright © 2004 Ahamcd Katnccl Mydin Mccra 
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transmitted or stored in a retrieval system, in any form or by any means, 
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permission of the copyright holders. 

Perpustakaan Negara Malaysia Cataloguing-in-Publication Data 

Mccra, Ahamcd Kamecl Mydin 

The theft of nations: returning to gold / Ahamcd Kamecl 
Mydin Meera. 

Includes index 
Bibliography: p. 175 
ISBN 967-978-890-3 

1. Dinar. 2. Monetary policy. 3. Banks and banking. I. Title. 

Printed and bound in Malaysia. 

By the time, 

Verily man is in loss 
Except such as have Faith, 

And do righteous deeds, 

And (join together) 

In the mutual enjoining 
Of Truth, and of 
Patience and Constancy. 

Holy Qur’an, Sura Al- £ Asr 103 

To my father 
Mydin Meera Allapitchay 
and to those who place 
Truth above self 






1. Stakes in the Current Global Financial System 3 

2. Seigniorage — The Instability and Unjustness of the Fiat 
Monetary System 28 

3. The Theft of Nations 43 

4. Islamic Banks and the Fiat Monetary System 53 


5. The Gold Dinar Solution 65 

6. The Gold Dinar in International Trade 87 

7. The Gold Dinar in Domestic Transactions 101 

8. Conclusion 117 

Appendix A 123 

The Equation of Exchange 

Appendix B 126 

Riba in the Holy Scriptures 

Appendix C 130 

The Money Creation Process Illustrated 

Appendix D 136 

Currency Speculation and Arbitrage 

Appendix E 142 

Country Monetary Aggregate Proportions and 
Growth Rates for the Period 1986-1996 

Appendix F 144 

Hedging Foreign Exchange Risk with Forwards, Futures, 
Options and the Gold Dinar: A Comparison Note 

Appendix G 161 

Some Basic Facts about Gold 

Appendix H 164 

Speech by the Prime Minister of Malaysia 
The Hon Dato’ Seri Dr Mahathir bin Mohamad 
at the Gold Dinar in Multilateral Trade Seminar 
IKIM Hall, Kuala Lumpur 
On October 23, 2002 

Bibliography 175 

Index 182 


THIS BOOK IS a critique of the interest-based global fiat monetary 
system. It highlights the many shortcomings inherent in this 
system, particularly the stability and justness aspects. It then argues 
in favor of real money systems like the gold dinar that was mooted 
by the Prime Minister of Malaysia, Dr Mahathir Mohamad, as a 
solution or a way out from the fiat money debacle. The word dinar 
simply refers to a unit weight of gold, just like the British sovereign 
and other gold coins. Hence, our statements on the gold dinar are 
equally applicable to all gold coinage or even gold itself. 

The book starts ofFby showing how nations, particularly the 
developing nations, lose significantly within the global interest- 
based fiat monetary system. It attempts to reason with the reader 
why globalization and financial liberalization are akin to 
colonialism, and why a total cashless society may perfect this 
colonialism. It also argues why, within the current monetary 
system, it is impossible for Islamic banks to operate independently 
from interest rates or riba that is strongly condemned in Islam. 

The book then discusses how the gold dinar may be implemented 
for settling bilateral and multilateral trade balances and for use in 
domestic transactions. The many advantages of the gold dinar over 
the fiat monetary system are also discussed, including its superiority 
as a hedging tool for managing foreign exchange risk compared 
with other derivative instruments like currency forward rates, 
futures and options. 

This book is written with the layman in mind and hence avoids 
complex mathematical models. It does not intend to bog down the 
reader with statistics and charts but rather invites the reader to 
ponder over and contemplate things. Nonetheless, the views and 
opinions presented herein are the author’s alone and may not 
necessarily represent the views and opinions of the Malaysian 
Premier, the Government or the International Islamic University of 

Ahamed Kameel Mydin Meera 
Kuala Lumpur 


Many people need to be acknowledged for their support given in 
one way or another in the writing of this book. Special appreciation 
goes to my mother Madam Beevi Fatimah Mohamed Ibrahim 
whose encouragement and prayers cannot be discounted. Also for 
my long time friend Rais Hussin Mohd Ariff who insisted that I 
write this book. My thanks also go to my colleagues, friends and 
students for their support, advice and assistance. Special 
appreciation goes to Dr. Aziuddin Ahmad, a fellow of the 
AlBukhary Foundation, Mohd Adnan Holden, Andrew Lopez, 
Mohamed Firdaus Kader Mohideen and Moussa Larbani for going 
over the initial draft and providing valuable suggestions. 

I am also encouraged by the success of my earlier book The 
Islamic Gold Dinar published by Pelanduk Publications and the 
consequent 2002 International Conference on Stable and Just Global 
Monetary System that was held in Kuala Lumpur, Malaysia on August 
19-20, 2002. 1 am particularly indebted to the speakers and 
participants of the conference for the excellent discussions that 
surfaced. This includes Tan Sri Dato’ Nor Mohamed Yakcop, the 
special economic adviser to the Prime Minister of Malaysia, Prof. 
Bernard Lietaer (author of the book The Future of Money), Tarek el- 
Diwany (author of the book The problem with Interest), Rev. Peter 

f, - 

Challen and Rodney Shakespeare of the Christian Council for 
Monetary Justice (UK), Prof. Mashudul Alam Choudhury (author 
of Money in Islam), Prof. Kabir Hassan, Dr. Mazhar Iqbal and Prof. 

Mohamed Anwar. My special appreciation also goes to those who 
were instrumental in the organizing of the conference. The list is 
very long, but of great regard are Tan Sri Dato’ Seri Sanusi Junid, 
the President of the International Islamic University Malaysia, Prof. 
Dr. Mohd Kamal Hassan, the Rector of the University, Assoc. Prof. 
Dr. Mohd Azmi Omar, the Deputy Rector (Academic), Dato’ 
Megat Mohamed Megat Abdul Wahab, the Managing Director of 
the Royal Mint of Malaysia and the members and staff of the 
Department of Business Administration. I would like to take this 
opportunity to congratulate the Royal Mint of Malaysia for 
launching the first Malaysian gold dinar coin on July 28, 2003. 

This list of acknowledgements would be incomplete if I failed 
to mention my wife Noraini Salleh who certainly deserves a special 
place for all her encouragement, understanding, support and 


THE GOLD dinar is getting some attention from various quarters 
including the banking sector, the private sector, governments and 
academics. The situation in the global monetary system seems to 
have convinced many, of the problems inherent in the present 
interest-based fiat monetary system; particularly its unjust and 
unstable nature. In searching for solutions, many have begun to 
view gold as a viable and promising alternative, which is also seen as 
an important missing link in the Islamic banking and finance arena. 
The current global financial system is on the verge of collapse due 
to the unsustainable nature of the fiat monetary system. Fiat money 
has become an excellent tool for speculation, manipulation, rigging, 
economic dominance and colonization. The history of the Muslim 
world is a clear example of this. In the Malaysian proposal, the gold 
dinar is to be initially used for settling bilateral and multilateral 
trade balances among a group of participating countries. The gold 
dinar was the currency of the Muslim world until the collapse of 
the Ottoman caliphate in 1924. Being the single currency of the 
then Muslim world, the dinar united the Muslim nations as a trade 
■ bloc. Trade flourished from Morocco in the West to Malacca in the 
East. A powerful Muslim rule had then emerged, with Muslim 
dominance in knowledge, the global economy and politics. 

The collapse of the Ottoman caliphate was an unfortunate 
event in Muslim history. In consequence, the Muslim world found 
itself disintegrated and colonized. Its monetary system based on 
gold and silver was then replaced by national currencies that were 
basically fiat money. For the first time, interest or riba entered 
triumphantly into the Muslim world thereby successfully 
marginalizing the teachings of all the three Abrahamic faiths — 
Judaism, Christianity and Islam — that strongly condemned the 
practice of charging interest. With the adoption of paper money and 
interest, Muslims became increasingly divided and vulnerable; a 
glorious civilization that was once endowed with abundance of 
wealth, knowledge and power, was reduced to one plagued with 
poverty, high illiteracy, impotence and backwardness, which was 
subject to wide oppression. Even a great civilization like Egypt, with 
the Nile still as fertile as ever has now been reduced to a perpetual 
state of being a “developing nation” within this system. Equipped 
with little international reserves particularly the US dollar for 
international trade, many developing nations, including most 
Muslim nations, are currently in pathetic conditions. 

The 1997 East Asian crisis clearly shows how national 
currencies have become tools for speculation, manipulation and for 
economic, cultural and political domination. The ringgit was 
attacked to such an extent that Malaysia was on the verge of total 
destruction when the government swiftly and boldly nailed down 
the problem to offshore currency speculation which were simply 
transfers of ringgit between accounts held in Malaysian banks by 


means of simple accounting book entries. Speculative transactions 
are made even easier by the fact that money today is predominantly 
nothing but accounting figures in books or computer memory 
records. Millions and billions can, therefore, be transferred at the 
stroke of a key on the computer keyboard. 

Within this fiat money system, developing nations were, 
however, able to develop with varying degrees of success. Some 
countries including Malaysia were fortunate that they were able to 
develop fairly equitably. But today, the fiat money system has 
reached a level such that it is no longer advantageous, particularly to 
developing nations. 1 2 In the current era of information technology, 
globalization and neo-liberalization, developing nations are about to 
give away their national wealth and sovereignty to the foreign 
financial masters practically for “free”. Even now, the wealth of 
weaker nations is being plundered away easily and thereby creating 
economic destitution in these countries. However, the stakes have 
never been this great before. In Malaysia for example, even with its 
bank merger exercises, its financial institutions still cannot match 
the foreign giants in terms of size. Therefore, the financial 
liberalization planned to take effect by the year 2007 and thereby 
the entry of foreign banks into Malaysia is, in fact, a threat. This 
book partly attempts to reason with the reader why this is so. The 
current fiat money system is also accused of causing numerous 

1 The term “offshore” is somewhat misleading since it seems to suggest that 
transactions take place outside the shores of the nation. Nonetheless, the fact is 
that speculative transactions take place, inside the country with ringgit being 
transferred between accounts held within the local banks. 

2 The situation in the developed nations too has reached a very unstable position 
such that the global financial structure seems to be on the verge of collapse. 
Financial distress and bankruptcies of large corporations and banks are more 

socio-economic problems. On top of that, operating within the 
current monetary system, Islamic banking also faces problems in 
attempting to realize its own identity, distinct and independent 
from the conventional interest-based banking. Islamic banking and 
finance are linked to the present conventional banking through the 
fiat money system. Any price differentials between these two 
banking practices can be arbitraged away easily thereby causing both 
to converge and become equal in essence. The mechanism of 
arbitrage and convergence also forces the Islamic banks to 
incorporate the interest rate factor when pricing their Islamic 
financial products. While the Islamic bank was established with the 
objective of providing alternative interest-free banking, in essence 
this has not been realized yet. Arbitrage and hence convergence 
between Islamic and conventional banking and finance are 
discussed further in Chapter 4. In order to solve or minimize the 
problem or protect oneself from the many negative effects of fiat 
money, there are proposals that the existing Islamic banking and 
finance system be complemented with the gold dinar. The gold 
dinar is nothing more than a gold payment system. The gold dinar 
is seen as a missing piece in the Islamic banking and finance arena, 
which is capable of providing unique solutions to many of the 
problems faced within the fiat monetary system. The gold dinar 
could bring out the true difference between conventional and 
Islamic banking, by placing a solid obstacle between the two that 
prevents arbitrage and convergence and thereby effectively 
dichotomize both the banking systems. 

Accordingly, a return to the gold dinar is viewed as highly 
desirable and urgent in the current era of globalization, to 
circumvent the many problems faced within the interest-based fiat 

monetary system. Nations may adopt the system and thereby reap 
its numerous benefits. Gold has, in fact, played the role of money in 
most civilizations for thousands of years. While many are convinced 
about the importance and significance of the gold dinar, there are 
questions that need answers particularly those regarding the 
implementation of the gold dinar within the present fiat monetary 
system. An abrupt implementation of the gold dinar is definitely 
not a wise thing to do, for that can bring about numerous other 
problems. This book is basically a critique of the fiat money system 
and argues in favour of the gold dinar, while providing some 
models and suggestions for its implementation. 

This book is written from a Muslim perspective due to the 
author’s inclination towards the strong Islamic tenets that call for 
abstinence from interest or riba and uphold justice among people of 
all nations, races and creeds. The fiat money system is criticized 
here primarily from the viewpoint of justice and stability. 
Nevertheless, the arguments put forward are also applicable for all 
nations, Muslim or otherwise, many of which are disadvantaged or 
enslaved by the present monetary system. 

The concept of the gold dinar was mooted by the Malaysian 
Prime Minister, Dr Mahathir Mohamad, calling nations to settle 
international trade balances in gold. The acceptance of the 
Malaysian Premier’s call is yet to be seen, but the proposal however 
warrants serious attention particularly from developing nations that 
are likely to benefit most from a gold payment system in facing the 
challenges of globalization and neo-liberalization. 



Chapter 1 

Stakes. in the 
Current Global Financial System 

If ye do it not (give up usury), take notice of ivar from Allah and His Messenger. 

— Qur’an (Al-Baqarah 2:279) 

The study of money, above all fields in economics, is the one in which complexity is used to 
disguise truth, or evade truth, not to reveal it 1 — John Kenneth Galbraith 

TODAY’S GLOBAL FINANCIAL system is in a situation it has never been 
in before. Major economies — the United States, Europe and Japan — 
are simultaneously showing signs of financial distress or even collapse. 
The vulnerability of the global monetary system is more obvious and 
clearer than ever. An impending global recession seems unavoidable — 
a situation some economists and financial experts predict to be even 
worse than that of the Great Depressions of the 1930s. Judy Shelton, in 
her book Money Meltdown, predicts that a global monetary collapse is 
imminent. As a response to or defence against the current financial and 
economic chaos, there is a growing global movement which is calling 
for the use of gold as money. 2 In Malaysia, the Prime Minister, 

1 John Kenneth Galbraith, Money: Whence it came, Where it went, Houghton Mifflin 

Co., Boston, p.5. y 

2 The e-dinar (by the Murabitun Movement), e -gold, goldmoney, goldeconomy etc. 
are some examples. The World Gold Council had organized at least three 
international conferences addressing the role of gold in the international monetary 
system. Other solution providers include The Christian Council for Monetary 
Justice (United Kingdom), Bernard Lietaer’s TERRA project and Zakaria Bavani’s 


Chapter One 

Dr Mahathir Mohamad, has called on countries to use gold for settling 
international trade balances and thereby intr oduce some stability and 
justness into the present system. The benefits of using gold may be 
appreciated better if one understands why the fiat money system is 
currently not working to the advantage of countries, particularly the 
developing nations and why it is likely to collapse due to its very 
design. This chapter attempts to elaborate on this further. 

The Main Features and Stakes in the Current Monetary System 

Three main features of the current monetary system pertinent to our 
discussion are: 

1. Interest 

2. Fiat money — i.e. money without any intrinsic value. Paper 
money and bank money (also known as credit money or 
accounting money) 

3. Fractional reserve banking 

These three features are well -elaborated in textbooks and are 
fundamental to the process of money creation by the banking sector. 
Interest has a number of serious negative effects on the economy, while 
fiat money and fractional reserve banking allow the creation of bank 
money or credit money. This book argues that these features are 
detrimental, particularly to the developing nations from the current era 
onwards. The following fictitious story may help in expounding the 
effects of the above three features of the current monetary system on the 
economy and sovereignty. The ending of the story is something that we 

Real Money Unit (RMU). Please see their papers in the Proceedings of the 2002 
International Conference on Stable and Just Global Monetary System, Kuala Lumpur, 
August 19-20, 2002. 


Stakes in the Current Global Financial System 

postulate would be common to developing nations ultimately in the 
current global monetary system unless something is done about it. 

The Story of the Sukus and the Tukus 

There were once two neighbouring islands far away in the 
oceans. One was called Aya and the other Baya. A certain 
people called the Sukus lived on the island of Aya. It was a 
fertile island with lush vegetation and tropical fruits. There 
were numerous waterfalls and rivers that provided the people 
with clean water and places for family retreats and recreation. 
The surrounding seas were unpolluted, with abundant fish 
and other seafood. The island also had gold and the Sukus, 
particularly the womenfolk, loved gold. They used pieces of 
gold as money since everyone treasured gold. Their tribal 
leadership led by a man named Saka, minted the gold coins. 
They lived a simple cooperative life and there were no interest 
charges for lending and borrowings among themselves. 
Occasionally, some tidal waves and strong winds destroy some 
property, particularly homes, but the community would 
immediately help themselves to rebuild or repair the damaged 
property. Other than that, it was a peaceful community of 
people who went about their life gracefully. 

The island of Baya, on the other hand, was inhabited by a 
people called the Tukus. Their leader was an elderly man 
named Taka. The island of Baya was fertile too and the Tukus 
were mostly farmers who worked rice fields or kept cows, 
sheep and poultry. Some of them were good at handiwork 
and produced a variety of household items. They too lived a 
very peaceful and cooperative life, mutually helping each 
other for survival. The Tukus were, however, not so 
sophisticated as the Sukus, in that they merely did barter trade. 
The Tukus realized that the Sukus were much wealthier, 
healthier and had towns that y/ere much more sophisticated 
than their own. They had always thought that the Sukus were 
more gifted and superior beings than themselves. Even 
though they barter traded their goods occasionally with the 


Chapter One 

Sukus they never got the idea of money. However, their 
women-folk too loved gold, particularly the gold jewellery 
that the Sukus made. 

One day, two smartly dressed men arrived in a ship on the 
shores of the island of Aya. Their names were Gago and Sago. ' 
The Sukus being a very hospitable people welcomed their 
new guests. Gago and Sago impressed the Sukus with the 
stories of their extensive travelling. They showed them some 
gold coins from other parts of the world and also some 
printed papers that were apparently used by some far-away 
people as money. The Sukus had never seen paper before. 

The paper money even had pictures of bananas on it — their 
favourite fruit. The two strangers also showed them a 
machine that prints such money. Wow! That got the Sukus’ 
attention. They were awed because they had never seen 
anything like that before. The islanders loved Gago and Sago 
and invited both to live with them on the island. 

Gago and Sago convinced the people that an institution 
called a bank would benefit the people immensely. They 
explained that a bank would provide a place for keeping their 
gold money safe while uplifting their economic conditions by 
making the savings available to others for productive use, 
which otherwise would remain idle. The Sukus, being a 
people who loved to help others, thought that was a great idea. 
Gago and Sago then built a small building structure with a 
vault in it and started operating the first bank on the island of 

They celebrated the occasion by giving the islanders a 
great feast along with a colourful festival of events. The people 
thronged to deposit their gold coins with the bank. Depositors 
were given a piece of printed paper for every gold coin they 
deposited, with the assurance that they could redeem a gold 
coin for every paper they turned in. The people were excited 
with the paper “money” they got because it even had a picture 
of their leader Saka beside a banana tree. No doubt Saka was 
very pleased too! 


Stakes in the Current Global Financial System 

The people deposited all their gold coins, a total of 100,000 
pieces and hence an equivalent number of pieces of paper were 
given out. Now the people used the paper as money and found 
that it was much more convenient than the heavier gold coins 
that they used before. The paper money printed by Gago and 
Sago, therefore, became the dominant currency of the island. 
Nobody used the gold coins anymore. The people were 
pleased with the ease with which they were able go about doing 
their businesses. They trusted Gago and Sago very much 
because each time they brought in a piece of paper for 
redemption their request was indeed honoured. Gago and Sago 
became very respected and honoured in their society. 

The Tukus who heard about the whole thing became 
excited and pleaded with Gago and Sago to help them out too. 
Gago and Sago smiled to each other and told the Tukus that 
they would indeed be very pleased to do so. They then set up a 
similar building in Baya, and Sago was placed there as the 
manager. The difference between Aya and Baya was that in 
Baya the Tukus had no gold coins to deposit. Sago told them 
that was alright. He would however, give 1,000 paper notes to 
each family to use as money. Since there were a hundred 
families in Baya, so 100,000 paper notes were given out. 
However, Sago reminded them that at the end of the year each 
family must return 1,100 paper notes, the 10 per cent extra 
being a charge for the services he was providing. The Tukus 
found the paper money truly to be like magic. It made their 
business dealings so much easier compared to their previous 
barter trade. People spent much less time looking for counter 
parties to trade with. Now they were able to specialize , in jobs 
they were good at. Their economy began to grow rapidly. 

Now Gago and Sago decided that the time was ripe for 
them to do their “trick” . . . Gago noticed that in Aya, on 
average only 10 per cent of the gold deposits were redeemed 
by the Sukus at any particular time. The other 90 per cent 
remained in the vaults. Noticing that their printed papers 
were circulating as money, Gago printed an extra 900,000 
certificates to be circulated as money too! Gago had calculated 


Chapter One 

that with the extra papers, a total of 1,000,000 pieces of paper 
would be outstanding and if the people came to redeem their 
normal 10 per cent, then the 100,000 original deposit of gold 
coins would be readily available for redemption. 3 Gago loaned 
out this extra 900,000 paper money to some “needy” Sukus at 
an interest charge of 15 per cent. 

The Sukus suddenly found that the price of things were 
rising. This baffled them and no one could figure out why. 4 
Some of them who had borrowed money from Gago were 
not able to pay back their debt even though they worked very 
hard trying to earn that extra money. 5 Business became 
increasingly competitive and the society became less 
compassionate and less caring towards others than previously. 6 
The Tukus too found similar things happening to them. 
Initially, they did not notice any price increase but they 
noticed some behavioural change in their people. They 
became very competitive in their attitude and less caring 
towards their fellows. Even with hard work and such 
competitive behaviour, some of the Tukus still defaulted on 
their loans. They were not able to acquire enough money to 
pay back their total debt. 7 Now Sago began to confiscate real 

3 This is how money is created in the current banking system in ag gregate. If the 
reserve requirement is 10 per cent, then for a deposit of 100,000 a total deposit that 
can be created is given by 100,000/0.10 =1,000,000. 

4 This is easy to see with the help of the equation of exchange, MV = PY. The 
equation of exchange is explained in Appendix A. In this example, with the sudden 
increase in the money supply M, without a corresponding increase in real output of 
goods and services Y, the price levels, i.e. P thus tend to increase (the velocity of 
circulation, V, is assumed unchanged and constant). 

5 The loan (principle plus interest) is not repayable in aggregate because the interest 

. portion does not exist in the form of money. Notice that the interest of 15% on the 
900,000 principal equals 135,000. Therefore the total amou nt repayable is 1,035,000 
but nonetheless, only 1,000,000 exist in total as money in the whole system. 
Accordingly, some defaults on the loans are sure to take place. This fact is further 
elaborated later. 

6 Since interest charges do not exist in the form of money, competition for money 
therefore ensues, reflected in increased business competition. This fact is also further 
elaborated later. 

7 Agai n, this is because there is not enough money in the system as a whole such that 

debt is not repayable in aggr egate. 


Stakes in the Current Global Financial System 

wealth from the loan defaulters — like land, cows, sheep, etc. 
Their elderly leader Taka was among those who defaulted. 
But Sago gave him and some other Tukus additional paper 
notes as a rescheduling of their loans. This increased further 
their indebtedness. Later Taka defaulted again and had his 
loan rescheduled again. Now Taka began to avoid meetings 
with Sago. He felt ashamed and found his former power, 
pride, courage and dignity falling. 8 On the contrary, he found 
that Sago was slowly becoming very wealthy by acquiring the 
people’s assets. In fact, he found that the power, pride, 
courage and dignity that he lost were now enthroned on Sago. 

After a number of years, Gago and Sago who once arrived 
on the shores of the island of Aya with only a printing 
machine, were now the owners of most of the land and 
property in both Aya and Baya. The people were reduced to 
mere workers, some of them now living in poverty. Many 
worked long hours just to make ends meet. They now had 
less time for family, friends or for religious activities. Social 
problems were widespread. People cared less for others. It 
goes without saying that with poverty, other social ills like 
crime, prostitution, etc. began to thrive. Their cultures were 
gradually replaced because Gago and Sago introduced a new 
“superior” culture of a “superior” people to which they 
belonged. This was the end of the caring and loving people of 
the two islands of Aya and Baya, who had earlier lived a 
peaceful yet graceful life before Gago and Sago arrived with a 
printing machine. 

Gago and Sago did not stop there. They continued to 
spread their wings to other peoples and societies. Their 
ultimate dream is to become the Global Supreme Rulers by 
establishing a single global bank with single global money. 

8 Imagine that you borrowed RM 10,000 from a friend. Do you think your behaviour 
toward the friend would change, say when you meet the friend in the street? 
Particularly when the stipulated time for the return of the loan had expired? 


Chapter One 

We postulate here that in the current global monetary system, 
developing nations would go through somewhat similar events as 
pictured above. Let us give a formal explanation for the above effects of 
the interest-based fiat monetary system. To begin, let us discuss the 
effects of interest on the economy. 

Interest and Its Effects on the Economy 

Interest is a prominent feature of the current global monetary system. 
Currently, it plays a marked role in all societies, including those that 
apparently profess the three Abrahamic faiths, i.e. Judaism, Christianity 
and Islam, all of which had strongly condemned interest in their 
original teachings. 9 Islam was the last stronghold, resisting interest- 
based monetary systems for centuries until the collapse of the 
Ottoman caliphate in 1924, the consequence of which was that interest 
entered successfully into the Muslim world. Many economists of 
today regard interest as the price of money or capital. It apparently is 
the price for parting from its use or benefit. It is therefore legitimate, in 
their opinion, to charge interest. They argue that it is therefore 
“erroneous” to prohibit interest charges, for otherwise that would be 
tantamount to an unfair treatment of the lender. Unfortunately, 
however, not many people seem to truly understand what interest 
charges actually do to an economy, particularly within a fiat money 
system. Some prominent experts on money have clearly identified 
these effects. Bernard Lietaer 10 and Tarek el-Diwany * 11 for example, 

9 Please see Appendix B: Riba in the Holy Scriptures. 

10 Bernard Lietaer, The Future of Money, Century, 2001, p.50 

1 1 Tarek el-Diwany, “History of Banking: An Analysis”, paper presented at the 2002 
International Conference on Stable and fust Global Monetary System, Kuala Lumpur, 
August 19-20, 2002. 


Stakes in the Current Global Financial System 

have identified, among others, the following three main consequences 
of interest: 

1. Interest requires endless economic growth even when actual 
standards of living remain constant. 

2. Interest encourages competition among participants in the 

3. Interest concentrates wealth in the hands of a small minority 
by taxing the majority. 

We shall attempt to explain the above effects using the equation of 
exchange shown below. 

In a fiat money system, we know that money supply increases 
through multiple deposit creation. How much money creation is 
possible depends upon the reserve requirement set by the central 
bank. 12 Money created through multiple deposit creation enters into 
the economy in the form of loans. 13 This initial ballooning of money 
supply can bring about some inflationary pressures. This is easy to see 
from the equation of exchange. The equation of exchange equates the 
monetary side of an economy to its real sector. It is something logical 
in the structure and is, therefore, a mathematical identity. 

12 Standard textbooks on money and banking or macroeconomics normally do cover 
the topic on money creation through the multiple deposit process. This process is 
briefly described in Appendix C. 

13 Tills bank money is the major component of money supply in most countries. The 
state money is the other form, i.e. the paper notes and coins issued by the 
government. However, contrary to what most people would expect, this state money 
is usually a much smaller component of the total money supply. Most people have 
the notion that all money is issued by the government, citizens deposit it with banks 
that pay them some interest, and that the banks would in turn lend the money to 
others at a higher interest rate. But this is not the truth . Most money is truly created 
out of thin air (and hence the term ‘fiat’) by the banks and equally surprising is the 
fact that even governments borrow money from these banks and pay interest on the 
loans (when they actually have the right to issue money — paper currencies and 


Chapter One 

MV = PY 

The left-hand side represents the monetary sector while the right- 
hand side the real sector. 14 When money supply increases through 
multiple deposit creation, M increases. If there were no corresponding 
increase in the real output of goods and services, i.e. Y, the price level P 
would rise assuming the velocity of circulation, i.e. the V remains 
constant. However, this new money enters the economy as loans, 
thereby demanding interest payment on it. This is precisely where a 
serious problem 15 lies because the interest requirement itself does not 
ejqst in the form of money yet. Hence, total debt (principle plus 
interest) is not repayable in aggregate. The current monetary system 
can therefore be sustained only in a dynamic fashion by creating more 
and more money. This is done primarily by creating new debt that gets 
into the economy as additional money. 16 Some of this, of course, 
would be used for rescheduling defaulting loans. Accordingly, it is 
obvious that the mere sustainability of the system requires a 
continuous growth in money supply. Notice that if we want stable 
price levels, there needs to be a constant rise in the real output, Y, to 
match the growing M. This explains why the existence of interest 
charges requires endless economic growth for actual standards of living 
to remain constant. This is the first main effect of interest on society. 
This required increase in real output can take place through an 

14 See Appendix A for a further explanation on the variables in the equation of 

15 A structural “defect”. 

16 The government could also print paper money and introduce it into the economy by 
paying for the goods and se rvices it purchases. In this case the new money would be 
debt-free. In aggregate, debtors can acquire this additional money and use it to 
service their loans (principle plus interest). However, once this money gets into the 
banking system, it would also start-off a spiral of credit creation. 


Stakes in the Current Global Financial System 

increase in population (i.e. labour force) or through an increase in 
productivity or both. This also explains why in an interest -based 
economy there is so much emphasis on productivity and growth — i.e. 
basically to pay for the virtual interest that the financial system creates 
and charges on the real sector. The fact that total debt is not repayable 
in the aggregate also causes the society to compete for money, i.e. 
competing to acquire the cashflow needed to service debt (principle 
plus interest). Since there is not enough money in the system in total, 
some borrowers may succeed in repaying but some are sure to default 
(See Figure 1). Increased competition is the second main effect of 
interest on society. 

Now let us take a look at the link between money creation in the 
form of loans and its implications on financial management, 
particularly the general capital structure in the economy. 

We saw that the sustainability of the current monetary system 
requires additional money to be created, which generally takes the 
form of debt. However, debt in financial management has its limits 
and implications too. The level of debt a business can bear is 
constrained by the riskiness of the business itself. Therefore, the 
constant growth in aggregate debt in the economy makes financial 
default a certainty. With this, the next section explains why wealth and 
sovereignty are stakes in the current monetary system. 17 

Interest charges also cause wealth to concentrate in the hands of a 
minority by taxing the majority. 18 Being wealthy, this minority group is 
likely to have a low marginal propensity to consume. Therefore, 



17 Remember the story of Gago and Sago? 

18 Banks are generally in the hands of a minority (who provide the “financial services”), 
while the rest of the nation work in the real sector producing goods and services. 
Since the banks create most of the money for a nation in the form of debt, even a 


Chapter One 

Figure i: Flowchart Showing Stakes in the Present Monetary System 

small interest charge is a charge on almost the entire economic output. In dollar 
terms this is likely to be huge. 


Stakes in the Current Global Financial System 

money and wealth would tend to concentrate in their hands, without 
further circulation in the economy. This is the third main effect of 
interest on society. This concentration of wealth, in turn, would cause 
less and less money to circulate in the economy thereby bringing about 
numerous socio-economic problems associated with low circulation of 
money that includes unemployment. The society would notice 
increasing competition for money, whose circulation keeps 
decreasing. 19 This competition for money is also the second main 
effect of interest. 


In our earlier book. The Islamic Gold Dinar, we argued that 
increasing disparity in income distribution and the creation of poverty 
are both inbuilt in the interest -based fiat monetary system. While the 
World Bank was established in 1944, i.e. more than half a century ago, 
with the motto Owr dream is a world without poverty , the institution’s 
former chief economist, Nobel Laureate Joseph Stiglitz has the 
following to say: 20 

A growing divide between the haves and the have-nots has left 
increasing numbers in the Third World in dire poverty, living 
on less than a dollar a day. Despite repeated promises of 
poverty reduction made over the last decade of the 20th 
century, the actual number of people living in poverty has 
actually increased by almost 100 million. This occurred at the 
same time that total world income actually increased by an 
average of 2.5 per cent annually. 

In our opinion, tills is precisely what happens when we say tha t the business world is 
becoming increasingly competitive and challenging. It is simply competirion for 
money, brought about by wealth concentration in the hands of a wealthy minority. 
Joseph Stiglitz, Globalization and Its Discontents, London: Penguin, 2002, p.5. 


Chapter One 

In an interest-based fiat monetary system, such statistics should be 
expected rather than come as a surprise. Since the World Bank also 
indirectly creates money, 21 we contend here that the institution is 
partly responsible for the creation of world poverty rather than solving 
the problem. Its motto, therefore, would surely remain a dream 

...In order that it (wealth) may not (merely) make a circuit 
between the wealthy among you ... — Qur’an (Al-Hashr 


Stakes in the Current Monetary System 

In our opinion, money creation through the multiple deposit creation 
process is no longer desirable particularly for the developing nations in 
the current era of information and communications technology (ICT) 
along with globalization and neo-liberalization because you run the 
risk of a total take-over of your nation by the foreign financial giants. 22 
Please follow Figure 1 as we give an explanation for this. 

Money and Debt — Balance Sheet Counterparts 

In the present monetary system, money is created and introduced into 
the economic system primarily in the form of loans. The commercial 
banking sector creates money through multiple deposit creation from 
much smaller initial deposits. With fiat money and fractional reserve 
system, this is easily accomplished. For example, if the reserve 

21 For an explanation how the World Bank creates money, please see Michael 
Rowbotham, The Grip of Death, Jon Carpenter, 1998, p.140. 

22 Malaysia, for example, is likely to face this risk when foreign banks start operating in 
2007, as a result o f financial liberalization. 


Stakes in the Current Global Financial System 

requirement is 10 per cent, for an initial deposit of RM1,000, the 
system can support a total deposit of RMl 0,000 (so that 10 per cent of 
RM10,000 gives the RMl, 000 initial deposit held as reserve). This 
means apart from the original deposit of RMl, 000 the banking sector 
can create additional deposits of RM9,000. This addition is done in the 
form of loans and checking accounts and introduced into the 
economic system as money. This explains why money and debt are 


balance sheet counterparts. This debt shows up in the aggregate 
economy as private sector and public sector debt. In most countries, a 
large proportion of money supply is in the form of this bank money 
comprising simply accounting entries. The rest is paper money and 
coins issued by the government (statistics for 62 countries are provided 
in Appendix E). 

However, as argued earlier, a very important fact that needs to be 
noted here is that due to interest charges on loans, the total debt 
(principal plus interest) is not repayable in aggregate. 23 This is because 
the interest portion does not exist in the form of money. Therefore, in 
the aggregate analysis, default is a certainty by the mere design of the 
system. This can basically lead to two outcomes: (1) Confiscation of 
real assets (collateral and others), or (2) Rescheduling of the loan. 
Rescheduling of the loan requires additional money to be introduced 
into the economy in the form of additional loans. However, this of 
course would increase the indebtedness of the private sector and the 
public sector, and thereby in aggregate, essentially defers a higher 
default amount to a later date. This is the reason why the total debt 
(private plus public) in any nation (both developing and developed) 
increases over time. Therefore, the present system can only be 

23 See footnote 5. 


Chapter One 

sustained dynamically — but only temporarily for a period of time. 
Temporarily, because debt has financial implications on the capital 
structure of firms and thus the whole economy. 

The reason is this: Money is created and introduced into the 
economy — a risky world 24 — primarily by commercial banks, in the 
form of loans with some interest charge attached; and demands a 
payback of the loan plus interest in accordance to a riskless cashflow 
schedule. 25 The pairing of this “riskless” cashflow with the risky 
business world is a foundational mismatch from the beginning, i.e. a 
mismatch in the risk profiles. 26 Hence the birth of bank money itself is 
not on a good footing as far as the theory of finance is concerned. 27 

Debt in Financial Management 

Debt or borrowing is a significant means of financing in the present 
financial system. Individuals, firms and governments borrow from 
financial institutions to finance their activities — for consumption, 
investment, public expenditure, etc. Debt financing is particularly 
attractive to firms because it is generally a cheap form of financing. 
Issuance of new equity like shares is generally more expensive. 
Furthermore, interest paid on debt is also tax deductible while 
dividend paid on equity is not. 28 This tax deductibility of interest 

24 The business world is, on average, a risky world. However, individual businesses 
may face different levels of risk, some being riskier than others. 

25 Generally, loans are amortized periodically in accordan ce to legally binding loan 
contracts, usually on a monthly basis. The cashflow is riskless due to this ‘legally 
binding’ nature of debt service. 

20 This important fact is rarely highlighted even in academic works. 

27 You may well call bank money a “misfit” in the economy. 

28 Interest payments are recorded as expenses in income statements of firms, before 
arriving at the taxable income. Dividends are nevertheless deducted from the after 
tax income. Accordingly, the higher die interest expense, the lower the tax liability; 


Stakes in the Current Global Financial System 

further reduces the cost of debt. Accordingly, debt financing increases 
the return on equity (ROE) to existing shareholders. 

While debt is attractive, firms will have to carefully balance their 
capital structure between debt and equity because debt demands its 
payback according to a stream of riskless cashflow. When money is 
borrowed from the financial institutions or the public, the borrower 
promises a schedule of payment generally on a periodic basis as 
stipulated in the loan contract. The lender’s contractual cashflow is 
protected by law, thus making the position “risk-free”. Even in the 
event of bankruptcies, the debt holders (lenders) enjoy the privilege of 
being paid first before equity holders. This makes debt instruments 
attractive to lenders. 

If debt is the cheapest form of financing, then why don’t firms go 
for 100 per cent debt financing? The problem or the risk of debt 
financing is thus the cashflow commitment one has to give to service 
the debt. Whilst the borrower “guarantees” 29 a certain payment 
periodically, i.e. a riskless cashflow, the cashflow from normal business 
operations is rather risky. The firm has, therefore, got to match these 
in order to determine an optimal debt level that can be sustained to 
maximize firm value. How much debt a firm may go for depends on 
the business risk of the firm. Businesses with stable cashflows may go 
for higher debt levels. Examples include utility firms, that supply water 
and electricity. Cashflows in these sectors are not significantly affected 
during business cycle phases or seasonal trends. Even during economic 
downturns people still do want a stable supply of water and electricity. 

but the tax liability remains the same irrespective of the dividend amounts. This, of 
course, gives debt an advantage over equity. 

Assessing the creditworthiness of borrowers is what rating agencies do. 


Chapter One 

However, high risk businesses should not go for high debt levels since 
problems may ensue in servicing the debt particularly during difficult 
times when cashflows are not good. Electronics and airlines industries 
are examples of these. A reasonable indicator of business risk is the 
firm’s beta, a financial measure that estimates the market risk that a firm 
bears. Basically, beta measures the relationship between a firm’s returns 
to those of the market as a whole. Beta for the market itself is unity, 
which serves as a benchmark. 30 Any firm, industry or portfolio with a 
beta larger than one is considered riskier than the market while those 
with betas of less than one are considered less risky relative to the 
market. As a rule of thumb, therefore, one may say that high beta 
companies should not go for high debt levels. Nevertheless, it is 
important to note that on the whole, businesses bear risk that is 
generally higher than the debt itself since the beta for the “risk-free” 
debt is zero. 

Default is the Default of the Current Monetary System 

Having said that money is primarily introduced in the form of loans 
with some interest payments attached, it is important to recognize that 
total debt (principal plus the interest) is not repayable in aggregate. 

This is because the interest that needs to be repaid together with the 
principal does not exist in the form of money. This fact is very 
important as it has a number of serious implications. 31 For example, 
assume that money supply in the form of loans totals RM10,000, given 
out at an interest rate of 10 per cent. At the end of the period 
RMll,000 (i.e. RM10,000 plus interest of RM1,000) is due to be repaid. 

30 The stock market index like the Kuala Lumpur Composite Index (KLCI) is 
generally taken as a proxy for the market. 

31 Interest charge is therefore another misfit in the economy. 


Stakes in the Current Global Financial System 

However, only RMl 0,000 exists in the form of money. The interest 
portion does not. If additional money to the amount of RMl, 000 is not 
created and introduced into the system, then some borrowers are 
bound to default on the loan. Therefore, in this system three things 
may take place in the process of sustaining the monetary system 

1. Additional money in the form of loans is created and given to 
those who are defaulting (i.e. reschedule or restructure loans). 
This would increase the indebtedness of the borrower. 

2. Additional paper money and coins are introduced by the 
government to the extent of the non-existent interest money. 

3. The bank confiscates real wealth (collateral and others) from 
the borrower. 

The first two options imply that money supply in the economy 
continuously grows in order to sustain the system. The third option 
transfers real wealth from the borrower to the banker. In reality, the 
second option is hardly the dominant case. Surprisingly, even 
governments seem to be easily “tricked” into borrowing money from 
the bankers when, in truth, they have the right to supply money (paper 
notes and coins). The first and the third are hence the most likely to 

The first option causes money to grow in the economy in the form 
of debt — private sector debt, public sector or both, thereby causing 
these sectors to become increasingly indebted to the banking sector. 
The banking sector, having the power to give additional loans, 
effectively controls the ‘life-line’ off the borrowing units since it can 
decide which defaulting unit (for some units are sure to default by the 
design of the system) it would save (by giving additional loans) and 
which it would let fail. In the event of a failure, the bank may 


Chapter One 

confiscate real wealth from the defaulter. In Japan lately, for example, 
while the government suggested the buy back of bad debts with MO, 
i.e. state money, the bankers opposed it and proposed the monetization 
of shares instead (that effectively ‘confiscates’ real wealth). 

The section on debt in financial management mentioned that there 
is a maximum limit of debt that business entities or otherwise can bear, 
depending on their business risk. However, since money grows in the 
form of loans in the current monetary system simply to sustain it, 
businesses and governments will, therefore, increasingly become 
indebted until a level is reached which cannot be borne any longer . 32 
Notice that this is simply by the design of the system. When firms 
cannot take it anymore they will collapse. The financial distress of large 
firms like Enron and Xerox are examples of this. When governments 
get into such trouble, they too can collapse; and are likely to get 
replaced. There are many examples of this that include some Latin 
American and East Asian countries — Argentina is a recent example. 
The effects of such a collapse are that real wealth and sovereignty will 
gradually shift to those who control the financial system. 

We assert here that the banking and financial problems faced 

currently in Japan, Europe and the United States are primarily due to 

the above design of the system that is bound to collapse. Numerous 

financial crises and crashes have taken place in the past decades but 

now the global financial system is showing signs of an enormous 

impending crash because the above major world economies seem to 

have simultaneously reached “saturation” point. It is not difficult to see 

that this is because money is introduced into the system as loans 

through multiple deposit creation, with interest charges attached 


32 It is, therefore, not surprising that senior executives of large firms resort to 
accounting irregularities and basically cheat to portray growth. 


Stakes in the Current Global Financial System 

which, in turn, brings about further increases in debt until the whole 
system becomes unsustainable and thus ultimately collapses . 33 

The foregoing arguments suggest that continuous rescheduling of 
loans is impossible and default on debt is therefore unavoidable. 
Examples of late include the financial distress of Enron, Xerox and 
countries like Mexico, Brazil, Russia, Turkey and Argentina. Default 
by firms would transfer real assets to bankers while the default by 
countries would transfer sovereignty (and ultimately wealth too). In 
many cases, the foreign financial giants have initiated changes in 

The default on debt actually destroys money through the reverse 
process of money creation and thus is likely to bring about a banking 
crisis too. This “now-you-see-it-now-you-don’t” feature of fiat money 
also makes banks very fragile institutions — many banks in Japan, 
Europe and the United States are now on the verge of such a crisis. 

Since banks fail if a significant loan is defaulted, the failure of 
banks would thus transfer wealth to the bankers through the 
confiscation of collateral or otherwise. Therefore, while bank failures 
are bad for economies, they are not necessarily bad for bankers. In fact, 
this is a process that transforms the mere accounting figures (i.e. fiat 
money created from nothing by the banks) into real assets. The 

33 Many individuals have even obtained Nobel Prizes, analyzing issues within this 
interest -based fiat money system. The United States, Europe, Japan, the Muslim 
world and others have produced many intellectuals and ye t this is the kind of 
financial system we have decided to adopt. John Kenneth Galbraith the famous 
Harvard economist stated that the process of money creation is so simple that the 
mind is repelled. Otherwise, what couldjfor example, explain the fact that even 
countries with more than twenty Nobel Laureates in economics still show signs of 
serious economic problems? Our personal opinion is that an interest -based fiat 
monetary system is a tool for controlling resources, wealth and political power for 
those who defend and implement it, while being an insult to the intelligence of 
! those who accept it willingly. 


Chapter One 

bankers would acquire the real wealth of defaulters in the process. It’s 
kind of “realizing” the seigniorage of the accounting figures called 
money which they had created, i.e. from virtual numbers to real assets. 

In summary, in this era of globalization and neo -liberalization, 
interest-based fiat monetary systems no longer work to the advantage of 
developing nations because they tend to lose wealth and sovereignty to 
the foreign financial giants. 34 Therefore with financial liberalization 
nations are about to give away their wealth and sovereignty to the 
powerful financial giants practically for “free”. The entire process 
occurs subtly and gradually since interest is based on time. Therefore, 
its subtle effects may go unnoticed until the problem suddenly becomes 
visible. 35 The entire system is akin to “slavery” where economic 
development would still continue but the ownership of assets and 
sovereignty gradually gets transferred and eroded. The colonial masters 
when they left the countries after giving them “independence” made 
sure that interest-based fiat money banking systems were in place. The 
independent nations are, therefore, bound to ultimately lose their land J 
and sovereignty and be economically colonized again. 

By similar reasoning, therefore, in tackling the economic and 
financial crisis of 1997-98 among the best policies followed by the 
Malaysian government was that of not accepting the loan offer by the 1 
International Monetary Fund (IMF). Malaysia decided to use her own > 
ways of solving the lack of money problem, particularly by making a 
significant reduction to the reserve requirement ratio and selective 

34 This is the reason behind die title of this book ‘The Theft of Nations’. In Malaysia j 

foreign banks are expected to make an entry in 2007 due to finan cial liberalization, i 
Malaysia plans to carry out another merger exercise on its already merged banks in 
preparation for the anticipated tough competition from die foreign banks. However, 
diis could prove to be futile for the foreign banks are simply huge. The foreign 
banks are likely to gobble up the tiny local banks. I 

35 So developing countries, open up your eyes! ‘ 


Stakes in the Current Global Financial System 

! 1 

capital controls. Even though this brought about a slower economic 1 
recovery, it is highly commendable. If Malaysia had accepted the IMF ; 
loan, she would have been given nothing but some accounting records 
(not even paper money) created out of thin air and placed in some 
computers as “money”. But then Malaysia would have had to accept ; 
numerous conditions that would have ultimately transferred some 
sovereignty into the hands of the IMF. 36 In this way, over the years this 
is likely to result in a total transfer of power when nations fail to pay back 
their loans (remember that a fiat money loan with interest charges is not 
repayable in aggregate by the mere design — someone has got to 
default). So we have noticed many countries, like those in Latin America 
for example, collapsing financially. In the aggregate analysis, the interest 
portion has to be repaid ultimately in terms of real wealth through the 
confiscation of real assets like land, buildings and even firms. 

“The United States is seen as a predatory nation, looting the world 
with its control of the World Bank and the IMF, through its international 
financial system, through its rigging of currencies, the value of currencies, 
and so forth. We are living, in the United States, on what we steal, legally, 
because we make the laws that enable us to steal.” 

“Globalization of the World Economy is a Prescripti on for Disaster” by 
Lyndon B. LaRouche in the February 14, 2003 issue of Executive Intelligence Review. 


Interest is prohibited in all the three Abrahamic faiths, i.e. Judaism, 
Christianity and Islam. God in His absolute Wisdom forbade it for the 

Some people argue that countries that took IMF loans recovered faster. Sure they 
did. The analogy is simple: If two persons A and B were finan dally devastated but A 
got a handsome loan from C, whose economic wellbeing would be immediately 
improved? Sure A! But problems will show up when the time comes for A to repay 
the loan, just as many countries have ultimately experienced. In some cases, th e 
ballooning cumulative interest even exceeds the GDPs of some borrower countries. 


Chapter One 

sake of justice and the betterment of mankind. 37 Nonetheless, it’s the 
lack of faith, greed and sheer ignorance that has made mankind adopt 
the current unstable and unjust global monetary system that brings 
about numerous socio-economic problems. This includes even the 
Muslims who had earlier protected their economic system from riba 
until the collapse of the Ottoman caliphate. 

The fiat money interest-based monetary system has numerous 
socio-economic implications. 38 A list of the more important 
implications is as follows: 

1. Amplifies business cycles. 

2. Generally inflationary and necessitates the need to control the 
price of basic necessities, particularly agricultural products. 

3. Since the prices of many agricultural produce are somewhat 
controlled, this sector would be less attractive for investors 
compared to other sectors like the construction sector, etc. 
This may bring about land conversions, i.e. from agricultural- 
land to industrial land, etc. 

4. Constant creation of money and over creation of money 
provide a fertile ground for speculation, manipulation and 

5. Causes unemployment during economic downturns due to 
the destruction of money. The destruction of money causes a 
lack of money in circulation that, in turn, brings about slower 
business, business failures, bankruptcies and unemployment. 
It is the lack of'a medium of exchange, therefore, that prevents 

37 Appendix B provides some quotations from the Holy Scriptures that forbid interest, 
also known as riba in Islam. 

3H For a discussion of the numerous socio -economic implications of the interest -based 
• fiat money system, please see Ahamed Kameel Mydin Meera, The Islamic Gold Dinar,, 
Pelapduk Publications, Kuala Lumpur, 2002. 


Stakes in the Current Global Financial System 

the exchange of goods and services from taking place (See 
Box). 39 

6. Increased disparity in income distribution and hence the 
creation of poverty. 

7. Since the construction sector is one of the major sectors that 
absorbs the increasing money supply, prices of homes are 
bound to increase at a high rate, faster than the increase in 
income for most people. This also causes the average duration 
for housing loans to gradually increase. 

8. The creation of income disparity and poverty is likely to bring 
about numerous direct or indirect effects on society e.g. crime, 
forced female and child labour, child neglect, poor diet, poor 
health and education, etc. 

Aliens and the Slum Dwellers 

Two Aliens land in a slum neighborhood on the outskirts of a 
city. They are welcomed by the people; and both sides exchange 
conversations. The Aliens discover that most of the people work 
in the city; and are interested to know what they do for a living. 
One informs them that he is a construction worker who mixes 
concrete and lays clay roofs. Another tells them that he works 
for the water department that supplies clean, treated water for 
the people; and yet another works in a furniture factory, just like 
many of his other friends who work in one factory or another 
that produce various products. The Aliens also find that some of 
the people are jobless despite being educated and trained. 

The Aliens, however, are puzzled to see that in spite of all 
the knowledge and skills the people seem to have, the 
neighborhood is in a rundown condition with shabby homes, 
filthy streets, a polluted river, etc. Their houses are neither made 
of concrete nor laid with clay roofs, their water source is 
untreated water from wells and'.the polluted river. 

Four conditions must exist for a paid job to occur, i.e. job to be done, raw materials, 

. people willing to work and money. During a recession, all the conditions exist except 

*/ . that there is generally a lack of money in circulation. 


Chapter One 

The Aliens ask the construction worker, “Why is it that your 
home is not made of concrete?” 

“I need money,” replies the worker. 

The water department worker gives a similar reason for not 
having treated water for himself. He too needs money. 

The Aliens then reason with the people, “Since there is a lot 
of talent in the neighborhood why doesn’t each of you provide 
for the needs of each other according to your skills? In that way 
your standard of living and the environment can be uplifted.” 
The villagers again repeat that they are waiting for money. 
The perplexed Aliens ask, “Who is this money anyway?” 
Amused by the question and giggling, one of the villagers’ 
graduate daughter comes forward and explains “ Money is a 
promise to pay issued by . . . bla . . . bla . . . bla”. 

Dumbfounded, the Aliens exclaim, ‘You are waiting for a 
promise to solve your problems?!!” 

The Aliens look at each other and one whispers to the other, 
“There seems to be no intelligence on this planet. Let’s go!!”. 
And the visitors leave the planet. 

Adapted from “Waiting for Money, or is it Godot?” in Bernard Lietaer, 
The Future of Money, Century, p.146. 


Chapter 2 

Seigniorage — the Instability 
and Unjustness of the 
Fiat Monetary System 

Quiz: What item that is much loved, desired and striven for by people, whose possession is 
not a crime. ..but yet, it is a crime if you produce it? (Answer at the end of Chapter 2) 

THERE ARE A number of ways the wealth of nations is “stolen” by the 
wealthier and more powerful nations using the current global 
monetary system. This is basically done through the immense 
seigniorage of fiat money. Seigniorage refers to the difference between 
the face-value of money and the cost of producing it. For example, 
assuming that the cost of producing a 100 -dollar note is 20 cents then 
the seigniorage is $99.80. Seigniorage is a gain to the currency issuer. 
It’s the benefit one derives from the first use of fiat money. The 
bankers who create money through multiple deposit creation basically 
lend out this seigniorage at interest. Most governments get the 
seigniorage from the issuance of their respective national currencies. 
The Federal Reserve enjoys huge seigniorage from the issuance of the 
dollar since the dollar is also currently the dominant international 
reserve currency. Unlike most other currencies of the world, the dollar 
has strong purchasing power even outside the United States. 


Chapter Two 

International Reserve Currencies 

The stakes in the current monetary system, i.e. wealth and sovereignty, 
are transferred primarily through this seigniorage. The money created 
through the fractional reserve requirement system and the interest 
charges thereupon are basically also seigniorage. In the present global 
monetary system (that is fundamentally an interest -based fiat money 
system with floating exchange rates) developing nations lose 
tremendously from this seigniorage. This is a conscious and systematic I 
act of transferring wealth via a “legal construct” in what would 
otherwise be an unlawful transaction. Resources of the developing 
nations are basically being “stolen” through this system, i.e. through 
the magic of seigniorage. For example, if the United States buys crude 1 
oil from Saudi Arabia using newly created fiat money, then the United j 
States gets the benefit out of it. This is because the Saudis would have j 
to give their oil extracted through hard work and huge investments, j 
whereas in return they would most likely get an electronic accounting j 
record placed in some computers. Of course, the Saudis may not lose I 
anything since they can purchase other items with the “accounting 
money” but the fact remains that the United States was able to obtain j 
the oil with money created out of nothing. This is what seigniorage is J 

about. I 

| A global reserve currency like the dollar, therefore, enjoys 1 

> immense seigniorage, since it has global purchasing power . An 1 

international trade set-up that requires nations to accumulate foreign 1 
reserves before trading would greatly benefit the issuers of the I 

international reserve currencies at the expense of other nations. In the a 
case of the dollar, for example, the United States can create additional J 
money for use outside the country without placing undue inflationary! 
pressure domestically. However, if all the dollars around the globe 


Seigniorage — The Instability and Unjustness of Fiat Monetary System 

were to return to the United States, that would surely be 
hyperinflationary. The dollar’s role as the international reserve 
currency has caused huge trade imbalance between the United States 
and the rest of the world. 1 In the fiat monetary system, the absence of 
an automatic adjustment process has enabled the United States to 
accumulate such trade deficits, which otherwise would have been 
impossible under the classical gold standard or the Bretton Woods. In 
those days, deficit countries settled their deficits in gold (that cannot be 
created) but today deficits can be settled with debt (that can be 

Hence it is certainly a “good idea” for the United States to call 
dollar deposits outside the United States Eurodollars, 2 suggesting that 
these are different from the dollar itself. In fact, this could be so since 
the Eurodollar is subject to different regulations from the domestic 
dollar and even has its own exchange rates and interest rates. 
Interestingly, Eurodollars always remain in the United States 
regardless of who owns them or where in the world they were 
deposited. It’s all in accounting, i.e. Eurodollar transactions only 
transfer ownership of deposits at United States banks. Additionally, 
reserve requirements are not imposed on Eurodollar deposits, thus 
enabling the banks to invest every dollar of it. Therefore, the 
institutions that create the Eurodollars enjoy the huge benefit of 
seigniorage without causing inflationary pressure in the United States. 
This free cash flow can be used for financing domestic and 
international activities. This is shown in Diagram 1 below. In the event 

1 Richard Duncan, The Dollar Crisis, John Wiley, 2003 explains this fact well. 

2 The Eurodollars are dollar deposits placed i n foreign banks and foreign branches of 
US banks, distinct from the euro which is the common currency of twelve 
European nations. 


Chapter Two 

the euro succeeds in replacing the dollar as the dominant Internationa 
reserve currency, as the current signs are showing, then the euro, 
thereafter, will enjoy such enormous seigniorage. 

...the Federal Resetve System, the greatest engine of inflation ever 
created. Because there was no other international money, the Fed 
could now pump out billions and billions of dollars that would be 
taken up and used as reserves by the rest of the world. — Nobel 
Laureate, Robert A. Mundell, “The International Monetary 
System in the 21st Century: Could Gold Make a Comeback?” 
Lecture delivered at St. Vincent College, Letrobe, Pennsylvania, 
March 12, 1997. 


Diagram i: Seigniorage of the US Dollar and the Eurodollar 




The Eurodollar plays 
the role of 

The fact that dollars outside United States are called Eurodollars gives 
added benefit to the United States. In this way, the Eurodollar can be 
treated in a different way from the normal dollar as though it were a 
different currency. The institutions that create the Eurodollar enjoy 
all the benefits of seigniorage without much effect on domestic 
inflation (unless the Eurodollar tends to “return” to the US). Such 
seigniorage is no small amount. Other international currencies like 
the euro and yen would also enjoy such benefits; a benefit that can 
provide large but ‘free’ funding for domestic and international agenda. 


Seigniorage — The Instability and Unjustness of Fiat Monetary System 

Colonial Banks 

Colonialists were responsible for establishing the banking systems in 
the countries they colonized. Fiat money, interest charges and the 
fractional reserve banking system were firmly rooted, including even in 
the Muslim countries they colonized. Colonized nations must have 
lost huge amounts of wealth to the colonial masters through the 
seigniorage of the fiat money banking system. Even when the colon ial 
masters left, they made sure this system was in place. This loss is 
illustrated in Diagram 2 and explained below: ' 

Assume that before the introduction of banks, a fanner had some 
land 3 on which he planted rice. Now assume further that a single bank 
was then introduced in his village with a reserve requirement set at 10 
per cent. 4 Now assume that the farmer sells his rice and deposits 
RM10,000 in the bank. With this new deposit of RM10,000 the bank 
can create another RM90,000 of deposits in total such that the total 
sum is RM100,000. The total deposit is created so that 10 per cent of 
this amount equals the original deposit of RM10,000. 5 The RM90,000 
is given out as loans to borrowers. 6 This is where the power of the loan 
officers comes in. The loan officers can pass on the RM90,000 to their 
“friends” with which they could purchase part or whole of the farmer’s 
land. The farmer might consider the RM90,000 offer to be a good deal 
and, therefore, decides to sell off part of the land as illustrated in 



Or in the aggregate perspective you may consider this as the people’s total assets, 
which includes land etc. 

The reserve requirement is the proportion of deposits the bank must hold as 
reserves to honor normal demands by the depositors. This requirement is set by the 
central bank 

This additional creation of money is done in practice through multiple deposit 
creation, as illustrated in Appendix C. 

In the modern monetary system this is how most money is bom and introduced 
into the economy. The other money comprises the paper notes and coins issued by 
the government. 


Chapter Two 

Diagram 2. With the transaction, the ownership of the land is 
transferred to the officer’s “friends” and the farmer gets merely an 
accounting entry in the books. While the land is transferred, it is 
important to note that the creation of the additional RM90,000 was 
made possible by the farmer’s own original deposit. With such a 
system, in time it would not be surprising if significant amounts of 
land fell into the hands of the banker’s “friends”. When the banking 
industry entered the Muslim world after the collapse of the Ottoman 
caliphate, for example, Muslims were initially unwilling to work in 
conventional banks due to their interest -based nature. 7 Even if they 
were employed in the banks, they were rarely the loan officers. 
Nonetheless, Muslims still deposited their savings in the banks, thus 
enabling the money creation process. 

Diagram 2: Transfer of Real Wealth through Seigniorage of Fiat Money 

Reserve Requirement = 10% Farmer Deposits RM10,000 

Additional Money Created = Loans = RM90,000 



*rir *.**z-z**'i* , 3 




The additional money created, i.e. RM.90,000 is given out as a loan to a 
third party. The third party buys part (or the whole) of the farmer’s 
land. The third party gets the land transferred while the fanner gets an 
accounting entry of RM90,000 in the books — an amount created out 
of his own original deposit ofRMl0,000! 

Even as late as the 1970s one could observe this p henomenon. 


Seigniorage — The Instability and Unjustness of Fiat Monetary System 

Hence even though many Muslims in the colonized countries were 
hardworking businessmen, considerable amounts of wealth 
particularly real assets like land, buildings, etc. must have been 
transferred away from them through the mechanism of the interest - 
based fiat money system. 

Seigniorage and Interest Rates at the International Level 

The previous example showed how in the domestic scene real wealth 
(and sovereignty) gets transferred to those who control the financial 
sector. The gains would certainly be enormous if the mechanism could 
be replicated on a global scale. Sure enough, there are international 
banks that act as the central bank of all central banks, lending fiat 
money to countries that seek funding or that face financial distress. Yes, 
lending money that is fiat and imposing interest charges on the loans. 
From the earlier arguments and the illustrated example, one could 
easily see that on a global platform, with countries as players, on the 
aggregate default is a certainty whereas on an individual country basis 
the probability of default would be high. This is because, for example, 
say a country, A, takes a loan denominated in dollars from an 
international banker, in aggregate the system must create additional 
dollars for otherwise the loan is not repayable (Note that other existing 
dollars must have also come into existence primarily as loans, therefore, 
other debtor countries are also in similar positions.). Note that the 
borrower countries have no power to create the dollar. 8 Therefore, 
borrower countries must compete for the existing dollars circulating 
worldwide. This creates a demand for the dollar like a commodity. One 
way of acquiring dollars is by exporting goods and services to the 

. This is unlike gold, where no country enjoys the monopoly over its production. 


Chapter Two 

United States (where the dollar is the main currency) while another is 

by trading with other countries that have dollar reserves. Competition 
for the dollar would ensue and could be tough since there are not many 
countries anyway. Hence such international borrowing is likely to be 
“deadly” for most developing nations since their global competitiveness 
is generally not that good. Therefore, it is argued here that developing 
nations would lose their wealth and sovereignty easily to these 
international bankers. These international bankers have a profound 

knowledge of how the economic and financial systems work. Since the 
fiat money interest-based system amplifies business cycles, they know 
when exactly to move in 9 and offer their “bail-out loan packages an 
act that is sure to ultimately transfer wealth and sovereignty to them 

through the medium of something that was created out of nothing. j 

And they know that very well . 10 I 

Observed Modus Operandi of the International Monetary "Players" 

The international bankers and financial institutions seem to work in a •; 
well-coordinated way. Among their tools are hedge funds and 


Fiat money is created and destroyed in the accounting records. It gets destroyed 
when loans are repaid or due to default on loans particularly during recessions . This 
destruction of money creates many socioeconomic problems including business 
failures, unemployment and political crises. This “now -you-see-it-now-you-don t - 
feature of fiat money has a truly destabilizing effect. 

This reminds me of the Walt Disne y animation movie A Bug’s Life. The f 

international financial institutions are like the grasshoppers in tire movie while the 
third world populations are like the ants. The ants gather food, which periodically 
the grasshoppers come and take away forcefully. Ev en though the ants are much , 
larger in number relative to the grasshoppers, keeping the ants “in line was the 
objective of the grasshoppers. Just like the ants, in our real -life scenario developing , 
nations desperately need someone who can boldly tell these international financial . 
institutions “the ants gather food, the ants eat the food and the grasshoppers leave! 
When the grasshoppers refused to leave and threatened the ants further, the ants 
closed ranks and were victorious. We recommend this movie for t he moral lesson J 
contained therein. 


Seigniorage — The Instability and Unjustness of Fiat Monetary System 

international lending. Hedge funds are huge amounts of short -term 
money that move between countries within seconds. Being fiat in 
themselves (i.e. originally created out of nothing) the hedge funds are 
used for speculation, arbitrage and manipulation that bring in huge 
profits . 11 Apparently, hedge funds are also used to “discipline” 
governments. But the fact is that these international financial 
organizations are using the current system to their own benefit by 
gradually transferring to themselves the sovereignty of world 
governments, particularly those of the vulnerable and gullible 
developing nations. This is how we see them do it. 

Having a good knowledge of economics, business cycles and 
financial markets^ they destabilize economies using hedge funds 
movements particularly during the peak of business cycles. This 
becomes a cause for the turn-around for the ballooned economies, 
which thereby fall into recession — a period when fiat money gets 
destroyed which, in turn, translates into failing business, 
unemployment 12 and political problems. At this juncture, the 

11 Speculators attack currencies one at a time so as to maximize their profits. If they 
attacked currencies simultaneously, they may make their speculative profits but 
might not make much on the arbitrage side. When only one currency is attacked, its 
movement relative to other currencies would bring about the best arbitrage 
opportunities and profits. While we believe this is done intentionally to maximize 
profits, they call the “domino” collapse of currencies the contagion effect. Many 
economists do carry out contagion effect studies. There may be some truth in it 

12 As mentioned earlier, for a paid employment to take place, four conditions are 
necessary, i.e. 1) job to be done 2) labour willing to work 3) raw mater ial and 4) 
money. Notice that during a recession all the conditions exist except money that 

.■' becomes increasingly scarce due to its destruction in that period. As for raw 
^materials, there will be excess supply of it together with excess production capacitie s 
unlike during the peak of business cycles when there will be a shortage of both. 
.^Bernard Lietaer’s TERRA project (a commodity money) is based on this fact. Please 
■^■see Bernard Lietaer, The Future of Money, Century, p.249, and the Proceedings of the 
V2002 International Conference on Stable and fust Global Monetary System, International 
'Islamic University Malaysia, p.35. 


Chapter Two 

international financial institutions come in with their “bail-out” loan 
packages 13 while blaming the governments and corporations for 
mismanagement. 14 Prior to giving the loans, they would also prescribe 
significant interest rate hikes that are likely to bring about further 
business failures and unemployment. 15 Note that at this point, lack of 
money is really the problem. Hence money inflow into the economy 
through loans from the international financial institutions would seem 
as though it is truly helping the economies to recover since this new 
money would be able to bring together, to some extent, the 
unemployed people on the street and the excess capacity of businesses. 
But, of course, the “bail-outs” do not come without strings attached — 
a host of conditions are imposed that effectively transfer some 
sovereignty to the international financial institutions. In many cases, 
they also institute changes in the governments themselves, who are 
accused of “mismanaging” the economy. The new governments would 
be obedient and subservient to their lending masters. Hence one could 
imagine the amount of wealth and sovereignty that would be 
transferred on a global scale to these international financial institutions 
through seigniorage and interest charges. Isn’t that an excellent strategy 
to gain power over all peoples of all nations on earth — using the 
means of something that was created out of nothing? 16 The 
governments of many nations have been changed in this manner. 
‘Regime Change’ is their term. Some Latin American and Asian 

13 An interesting fact to note is that the leaders of these international financial 
institutions apparently seem to possess pleasant persona lities. 

14 In our opinion, the true mismanagement of governments is having the fiat money 
interest-based system itself — a system championed by the international financial 
institutions themselves. 

15 And thereby bringing people to the streets to protest ag ainst their governments. 

16 Even David Copperfield would envy this for he has to work hard to create his 

magical illusions to make a living out of it. - j 



Seigniorage —The Instability and Unjustness of Fiat Monetary System 

countries are clear victims of this. The reader may analyze and decide 
whether the list includes Indonesia, Thailand and South Korea. 
Malaysia survived because it simply refused their “loan”. With 
sovereignty lost, then politics, education, law, culture and the religion 
of the people would all be at stake. 17 This is a gradual process but 
surely it is the final destination of the dynamics of the system. 

, ..The true injustice ofTItird World debt, and the unwarranted basis of 
the power of the IMF and World Bank, only become apparent when 
the fraudulent nature of these ‘loans* is understood, and how they relate 
to the debt-based banking system. ..It is an injustice amounting to 
international slavery and extortion; it is an aggressive injustice, 
involving the subjugation of whole nations and their sovereign peoples, 
operated on a scale that exceeds the total of all the more obvious efforts at 
dominance by individual nations indulging in wafare over the 
centuries. Directed against vulnerable peoples and executed under the 
banner of ‘aid*, it is an injustice so profound and total and shameful that 
it is quite without any parallel in the history of human affairs. — 
Michael Rowbotham, The Grip of Death, Jon Carpenter, 1998, . 

In this respect, some developments taking place within Malaysia’s 
financial architecture need further attention. These are, for example: 

1. Issuance of Bankcards and the movement towards a cashless 
society in the near future. Even though a cashless society may 
sound very modem, advanced and impressive, numerous 
problems may crop up: 

What arc the signs when sovereignty is lost — and religion and culture are at stake? 

,, i ;: 'If, for example, Muslim sovereignty is lost, then a woman walking half -naked in the 
street may not bother the “new rulers” but one who decides to cover modestly with 
t ^^ hijab may bother them. Similarly, traffic noise may be dismissed as a price for 
’^development, but a call for prayers from the minaret of mosques may be regarded as 
^noise pollution and, therefore, be required to be stopped! 




Chapter Two 



• A total monopoly of what money is and its issuance by the 
banking sector. In other words, the issuance of the small 
proportion of currency and coins by the governments, i.e. 
state money, may also be totally “hijacked”, thus 
effectively removing from governments the right they 
have over the issuance of state money. 18 

• The system can be abused to “punish” or discipline 
anyone since there are no other types of money. 

• Confidentiality of peoples’ incomes, spending and savings 
can be totally “robbed”. 

• The entire economic, financial and political power will 
ultimately rest in the hands of those who control the 
financial system. 

The coming of the giant foreign financial institutions into 
Malaysia in 2007 due to financial liberalization. If this happens, 
all the concerns mentioned above can effectively fall into the 
hands of these giant foreign financial institutions. Even with 
bank mergers, all local banks — conventional and Islamic 
banks — are likely to be gobbled up “lock, stock and barrel”. 
The inauguration of the Islamic Financial Services Board 
(IFSB). While the formation of the IFSB is commendable, one 
needs to be wary of its relation to the international financial 
institutions. It should not in any way become an arm of the 
international financial institutions, for that might put it under 
the purview of rules and regulations that would undermine its 

18 Simple transactions like lending money to a friend or helping someone with a few 
bucks or even giving alms can become difficult or cumbe rsome under a cashless 


Seigniorage — The Instability and Unjustness of Fiat Monetary System 

Measures Developing Nations Can Take 

Here are some measures developing nations can take in order to protect 
themselves from the ravaging forces of financial liberalization and their 
effects on national wealth and sovereignty. The following actions are 
important in our opinion to prevent developing nations from becoming 
mere “slaves” of economic colonialism; thereby protecting their 
sovereignty, culture and religion: 

1. Do not implement a totally cashless society particularly when 
money is fiat. Here total money supply might come from the 
banking system alone unless the government takes control of it. 
Abuse of the system is likely to happen and may prove difficult to 
solve or reverse thereafter. 

2. Prevent financial liberalization from taking root in your land. In 
a fiat monetary system, the advent of foreign financial giants simply 
equals the giving away of a nation and its sovereignty to them 
practically for “free”. It is not through the benevolence of foreigners 
that a nation is developed. A country is developed only by its own 
people. Foreigners should, however, be allowed to come in only with 
real capital, expertise., Technology or otherwise and thereby 

"^legitimately and justly take a sfiarein the economic pie. But definitely 
NOT come in with fiat money which is created out of thin air. In 
fact, you may even consider the nationalization of banks so that 
total power to create money rests with the government alone. 

3. Allow complementary currencies like the gold dinar and other 
forms of real money to coexist along with the national currency. 
These real monies are by design inflation-free and bring stability into 
the economy. Complementary currencies can be used to achieve 
certain economic objectives without being inflationary. 


Answer to Quiz: Money! If you produce it, it is called counterfeiting. Fiat 
'gives an “unfair* 1 advantage, i.e. the seigniorage, to one who creates it and 
it is an offence to counterfeit. 


Chapter 3 

The Theft of Nations 

ou provide some happiness, some comfort to others , then your life becomes meaningful 
Jf your life creates problems or suffering to others, then there is no meaning to your 
existence. — Dalai Lama, Reader’s Digest; fuly 2003 

HAVING DISCUSSED SEIGNIORAGE in general in the last chapter, this 
chapter gives some specific ways nations may lose out further within 
this system. 

Currency Pegging and Seigniorage 

A country may be on the losing side if it pegs its national currency to a 
foreign currency and at the same time allows the foreign currency to 
be used in domestic transactions. Here is an example: The currency of 
an oil-producing developing nation is pegged to the currency of its 

more affluent and developed neighbouring country. Both the 
eiirrencies are exchangeable dollar for a dollar, and can also be used 
; {mterchangeably in both countries. In their arrangement, the banking 
Intern in the developing country is not permitted to create money in 
normal multiple deposit creation method — rather a creation that 
isfonly slightly more than the original deposit is allowed. The 
eighbour country nevertheless creates money in the normal multiple 


Chapter Three 

deposit creation way. This is illustrated in panel A of Diagram 3. 
Money for both the countries is, therefore, basically created in the 
neighbour country! With this newly created money the neighbour 
could purchase oil and other things from that poorer developing 
nation — this is huge seigniorage. 1 

Even without pegging, if a country allows the currency of other 
nations to be used in its land then that country also loses due to 
seigniorage. This is illustrated in panel B of Diagram 3. Some 
developing nations do allow other international currencies or a 
neighbour’s currency to be used in their land. In some instances the 
alien currency even becomes the dominant or preferred currency. 
Significant losses could be incurred from this. The foreign country 
could easily create and circulate additional currency of it own in the j 
developing nation. \ 

Fiat Money, Currency Speculation and Arbitrage 

In a fiat money system currency speculation and arbitrage thrive. Of . 
the trillions of dollars of daily foreign exchange dealings, only a minor, 
portion is actually meant for real transactions. The rest are for < 

speculative, arbitrage and hedging purposes. Currency speculators _ 
make billions of dollars of profit from manipulation, speculation and 
arbitrage. Since currency transactions are zero-sum games, in truth the 
people’s work and sweat, i.e. their real wealth, gets transferred to the 
speculators and arbitrageurs. The 1997-98 financial crisis almost , 
impoverished the Malaysian public. 2 j 

1 Similarly, seigniorage is also the gain to currency counterfeiters. Counterfeiters gain 

from the first use of counterfeit money. J 

2 Appendix D shows how speculative and arbitrage profits are made in the currency 1 

market. j 


The Theft of Nations 

Diagram 3: Currency Pegging and Seigniorage 

Panel A 

Country M NOT allowed to 
create money in the normal 
multiple deposit creation way 

M$1 = N$1 
Both currencies 
may be used 
interchangeably in 
both countries 


Country N creates money 
in the normal multiple 
deposit creation way 

If the currencies of two countries are usable interchangeably in both countries 
with a fixed exchange rate, then the benefit of seigniorage would accrue 
relatively more to the country that creates the more money. In the above 
example, country M loses out significantly to country N since money creation 
is effectively denied. 

Panel B 

Currency of country N can be used in 
country M but not vice versa 

If a country allows a foreign currency to be usable in its land, then the foreign 
country reaps the rewards of the seigniorage. In the above example, if the 
currency of country N can be used in country M but not vice versa, then N 

jJSjNns from seigniorage while M loses. In this case, country N can create 
; additional amounts of its currency (out of thin air, of course) to be circulated 
.Hjin country M without being inflationary domestically. 

: .liL 
r - 

: V>' •• 

' '.'A?- 


Chapter Three 

Protecting against the "Theft" 

Having discussed how nations could lose due to seigniorage and 
interest-based loans; we provide here a summary of how the “theft” of 
nations could occur and some action that may prevent this. 

The following are means by which a nation can enjoy the goods 
and services that it wants: 

1 . 

2 . 



Produce itself the goods and services it wants and/or trade with] 
others. This is the fairest and noblest way of all. 

Consume the savings of other nations. Importing more than 
exporting, this would show up in the form of trade deficits. 
Some countries produce more than they consume, like Japan 
for example. Therefore, another nation could borrow from 
such “surplus” countries and consume away their saved 
produce. The United States have been doing this for the past 
few decades. 

“Cheat” by means of lending fiat money to other countries 
with interest charges attached. We categorize lending money aj 
interest as cheating because the public and even leaders of 
nations are generally gullible and are not aware that money 
lent to them is simply created out of nothing. However, we 
argued earlier that the fiat money interest -based systems 
gradually transfer wealth and sovereignty to the lender. 

“Steal” by means of seigniorage for example. A country or a 
party may attempt to make its fiat currency an international 
currency or make it a ‘legal tender’ in other countries, etc. 3 

A current example is the invasion of Iraq by the United States of America. In 
October 2000, Saddam Hussein had announced that Iraqi oil would be priced in 
euros instead of the dollar. Other OPEC countries were expected to follow suit 
since Europe is a major trading partner of the Middle East that imports more oil 
than the US. These developments were expected to strengthen the euro further arflj 
challenge the dollar’s position as the dominant international reserve currency. The| 
seigniorage of the dollar is so huge that the US is likely to go to war to defend it. 
Some quarters assert that one of the main objectives of the American invasion of Ir 
is to protect the dollar’s position as the international reserve currency. Note that 
being a fiat currency the Iraq i dinar is likely to depreciate enormously after die 


The Theft of Nations 

Another way is to establish “foreign banks” in other 
countries and thereby create the money of the nations where 
they operate (as allowed through multiple deposit expansion). 

5. Rob or extort from others forcefully by taking away the 
wealth, resources and sovereignty of other nations, by means 
of war for instance. 4 * 

Many developing nations of the so-called Third World, instead of 
using their resources for developing themselves, actually further enrich 
the “wealthy nations by losing their wealth and sovereignty to them in 
the above mentioned ways. As such, some countries were able to 
acquire considerable wealth from other countries and thereby appear 
wealthy, mighty and powerful. This, in turn, seems to have also caused 
the brain drain from developing nations that saw their professionals, 
scientists and technical experts migrating to the wealthier nations. 

There are a number of ways developing nations may prevent the 
above, and thereby protect themselves. These are provided in Table 1. 

It would be best if the savings of a nation were utilized for the 
development and benefit of its people. In the real economy, savings are 
things produced but not consumed. In the fiat money system, a 
country may continuously run trade deficits in order to consume the 
savings of other nations. The country with a trade deficit would 
acquire the real goods and services while the country with a trade 
surplus would simply accumulate financial assets. For example, when 
the United States runs continuous trade deficits with Japan, then Japan 

. , invasion. The US, on the other hand, is likely to introduce the dollar into Iraq, and 
reinstate the pricing of oil in dollars. Even if a new Iraqi currency is issued, the US 

"/ T° Uld Sti11 en J oy,ts sei g niora g e - Such a currency may also be pegged to die dollar for 
that would effectively make it similar to the dollar. 

The war booty from the invasion of Iraq for example, is enormous, for Iraq sits on 

‘V , e secon d largest oil reserves in the world, with an est imated potential of 112 billion 

Chapter Three 

Tabie 1: Protecting against the "Theft" of Nations 

Means of “Theft” Protection 

1. Savings of Nation 

Use savings for domestic development as much as 
possible. Evaluate carefully when buying financial 
assets like bonds issued by another country or 
depositing savings there. Buying foreign financial 
assets can entail the outflow of domestic real goods 
and services. 

2. Seigniorage 

• Prevent foreign commercial banks from 
operating in the nation since a fiat money 
interest-based system allows them to create the 
money of the nation. 

• Do not price and sell goods and services in 
foreign currencies. Insist on national currency or, 
even better, insist on real money rather than fiat 

• Use a common currency or gold for international" 
trade settlements (in lieu of international reserve j 

• Do not allow foreign currencies to be legal tender! 
or usable domestically. 

• The gold dinar, other commodity monies and 

complementary currencies are some means of j 
protecting against loss through seigniorage. \ 

3. Lending Money at 

Do not borrow money at interest, particularly in the! 
currency of another country. By borrowing in a J 

foreign currency you effectively pass your “life-line”! 
into the hands of that country or the institution that! 
lends the money. 1 

4. War 

Prepare yourself militarily with the best of weapons! 
so as to command wholesome respect rather than 1 
inviting oppression and aggression from potential 1 
enemies and predators. M 


The Theft of Nations 

..umulates financial assets while exporting away its goods to the 
United States. 5 If the exports of Japan are priced in dollars then japan 
loses to seigniorage. Accordingly, it may be better if a savings surplus 
country invests the savings within the country or invests in another 
country in the form of FDI’s instead of accumulating financial assets 
like bonds. 

To prevent loss through seigniorage, firstly, a country should, 
where possible, prevent foreign commercial banks from operating in 
its land. 6 In a fiat money interest-based system, the foreign commercial 
banks would enjoy the right to create the currency of the nation. This 
is tantamount to giving away the wealth of the nation practically for 
“free”. Secondly, for international trade, do not price exports in a 
foreign currency for otherwise the alien country will enjoy the 
seigniorage. With electronic money, creating new money is no feat 
after all! Thirdly, never allow foreign currencies to be legal tender or to 
be usable domestically for otherwise the foreign countries will enjoy 
immense benefits from the seigniorage. They could even buy real 
property like land, buildings, businesses, etc. just by creating extra 
currencies and making them usable in the other country. Fourthly, do 
consider the option of allowing the use of real monies — precious 
metals like gold and silver, other commodity monies and 
complementary currencies. 7 

An interesting analogy for this was recently given by an anonymous writer: Its like a 
.. . shopkeeper who keeps lending money to his customers so that they could keep 
-patronizing his shop! 

' -{This proposition comes from the author’s belief that the right to create money (in a 
^at monetary system) must rest with the government. If this is not practical, then 
gther action should be taken concurrendy, like allowing other forms of money like 
complementary currencies and the gold dinar. 

jfyhe website is a good source of 
^information on complementary currencies. 


Chapter Three 

As for lending and borrowing at interest, a country should be wise 
enough not to borrow foreign fiat money at interest. By borrowing 
internationally at interest a country effectively passes its “life -line” to 
the lender country. As discussed earlier, in the aggregate sense, only 
the foreign countiy or other empowered institutions can actually create 
the extra money needed to service the interest portion. Hence it is 
never a good idea to borrow from international financial institutions 
like the International Monetary Fund (IMF), the World Bank, etc. 8 Let 
foreign institutions and countries take a share in national output only 
when they come in with real capital, knowledge, skill, expertise, etc. 
and not through lending money created out of thin air. 

As for war, the author is not an expert on this. However, we 
believe that every nation must be prepared militarily to defend its elf j 
against the threat, aggression and oppression of others. 9 It is better to 
live our one life in rightfulness and dignity than to pass it away as a 
slave of others. 

If our hypothesis on the “theft of nations” is true, then the 
international financial institutions (and wealthy nations) may attempt 
to prevent at least the following two from materializing: 

8 Consider a country like Mali that claims to be among the top gold producing 
countries in Africa. Yet it keeps borrowing from the IMF for its economic 
development programs. All that Mali would get from the IMF is some accounting 
entry as money, yet it would be repaying with its national wealth and resources 
including its gold. For dollar denoted loans, its life -line would be practically in the 
hands of the IMF or the United States that has the right to create that extra US 
dollar needed to service the debt. Such debt is likely to spiral into an ever -growing 
international indebtedness that significantly shifts wealth and power int o the han 
of the IMF. 

9 Note the following Qur’anic verse: “ Muster against them whatever you are able o 
force and tethers (ropes) of horses, so that you strike terror into the enemies of God 
and your enemy, and others besides them whom you do not know but God does 1 . 7 
(Al-'Anfal 8:60) 


The Theft of Nations 

1 . Gold as a medium of exchange and its use for settling 
international trade balances. 

2. Bilateral and Multilateral Trade Arrangements (BPAs and 
MPAs) between nations particularly between the weaker 
developing nations. 

The reason why the international financial institutions and wealthy 
nations may try to prevent the above two is because both 
independently but significantly reduce the reliance of developing 
nations on foreign reserve currencies like the dollar for settling trade 

As for gold, one action group based in the United States, called the 
Gold Anti-Trust Action (GATA) group claims that it has evidence of 
gold price collusion by the international financial institutions. The 
Gold Anti-Trust Action Committee was established in January 1999 as 
a Delaware corporation to advocate and bring suits against the financial 
institutions involved in the collusion against gold. According to the 
group, GATA was established to expose this manipulation of the gold 
market by a gold cartel consisting of financial giants like Goldman 
Sachs, J.P. Morgan Chase, Deutche Bank, the Bank for International 
Settlements, the U.S. Treasury and the Federal Reserve Bank of the 
United States. 10 



Chapter 4 

Islamic Banks and 
the Fiat Monetary System 

, , . For Falsehood is (by its nature) bound to perish. — Qur’an (Al-Isra’ 17:81) 

The Law of One Price 

IN OUR EARLIER book, The Islamic Gold Dinar, we briefly mentioned 
that in the present interest-based fiat monetary system, Islamic banks 
cannot be totally independent from interest rates and the conventional 
banks. In fact, the pricing of Islamic financial products is likely to be 
tied to the market interest rates. This is because if there are price 
. differences between the two, then arbitrage opportunities would set in, 
thereby enabling market participants to make easy profits. Arbitrage 
<r : between the two banking systems would, in turn, bring about a 
- . -.convergence between the two banking systems. This convergence is of 
Jfpo fault of the Islamic bank, but rather is a result of its co-existence 
liith the conventional banks, both of which are linked through the fiat 
’ioney interest-based system. Since its inception in Malaysia in 1983, 

li- 4 . 

.Qr example, both the Islamic banking and the conventional banking 
terns have responded to each other and thereby attained some 
||gree of convergence. 


Chapter Four 

An example of the convergence is home financing. In the initial 
phase of Islamic banking, a house buyer would start paying the 
instalments for home finance only after the house was completed, i.e. 
about two years from the time of signing the sales and purchase 
agreement. The buyer need not pay any interim payments as is the case 
with conventional financing. The interim payments are indeed interest 
charges for the progressive payments made by the bank to the developer 
during the house construction period. During this phase of Islamic 
Banking, the non-existence of interim payments in Islamic home 
financing made it cheaper than the conventional one, thereby increasin 
the demand for such financing. 1 This increase in demand, of course, pu 
pressure on the Islamic bank to increase its rate. Currently, those 
wishing to finance homes using Islamic principles would have to pay a 
initial deposit equal to three-months payment into an investment 
account 2 and are additionally also required to pay the first instalment i 
the month immediately after the bank releases the first payment to the 
housing developer. This first payment is usually about 10 per cent of tH 
total price of the house, paid when the foundation for the house had 
been completed. These changes to the financing conditions made 
Islamic financing more expensive than its conventional counteipart aril 
thereby made people opt for conventional financing or attempt to 
refinance the existing ones. This is an example of how the two bankin 
systems moved towards convergence. 

Another example of possible arbitrage between Islamic banking 
and conventional banking is as follows. This example is the applicatio 

1 In fact, many non-Muslim buyers financed their homes using the Islamic mode J 
during this period. At times the number of non -Muslims who financed their horn 
using Islamic modes exceeded that of even the Muslims! 

2 That pays a return lower than the cost of financing. 


Islamic Banks and the Fiat monetary System 

of rate swaps between the two markets. Today, Islamic banking is 
predominantly a fixed rate market while conventional banking is 
characterized by variable rates. The difference in financing costs for 
bonowers in both markets would create arbitrage opportunities. 
Consider two corporations, A and B, that are faced with the following 
financing costs in the Islamic fixed rate market and the conventional 
floating rate market (See Diagram 4). Corporation A that enjoys a 
better credit rating can borrow more cheaply from both the fixed and 
floating rate markets compared with corporation B. In the Islamic fixed 
rate market A can borrow at 8 per cent per annum while B can borrow 
at 9 per cent, a difference of 1 percentage point. In the conventional 
floating rate market, A can borrow at KLIBOR 3 plus 0.5 per cent while 
B can borrow at KLIBOR plus 3.5 per cent, a difference of 3 

percentage points. Therefore, corporation A enjoys an absolute 
advantage in both markets relative to corporation B, but a comparative 
advantage in the floating rate market where it can borrow at a much 
lower rate than coiporation B. This inversely gives corporation B a 
comparative advantage in the Islamic fixed rate market. The existence 
of comparative advantages makes it possible for arbitrage profits to be 
.pade by means of rate swaps between the Islamic and conventional 
•.markets. The way to do this is shown below. 

^Tv^ surne an investment banker is aware of the above 
J§|rrowing costs of its two client corporations, A and B. Additionally, 

Kuala Lumpur Interbank Offer Rate. 

^ith the difference in creditworthiness among corporations and thereby credit 
togs by rating agencies, absolute advantages and comparative ad vantages are likely 
irff Ur l t0 ^ °^ t * iat> * n die present dual system many corporations are 
^Hnerent between borrowing in the Islamic fixed rate market or the conventional 

T" C t Theref ° re ’ cor P°rations may engage in rate swaps in orde r to 
acnetit trom the difference, a transaction that may even be assisted by bankers 
emselves for a share in the pie. 

Chapter Four 

Islamic Banks and the Fiat monetary System 

the banker has ascertained that each party would be indifferent to 
borrowing fixed or floating and will sign a rate swap agreement if 
offered a 0.5% benefit. 

Diagram 4: Arbitrage between the “Islamic” Fixed Rate Market and the 
Conventional Floating Rate Market 




Islamic Financing Conventional Financing i 
Fixed rate Floating rate 

8% KLIBOR + 0.5% 

9% KLIBOR + 3.5% 

(i.e. 8 - 0.5 = 7.5 per cent) while B will end with a floating rate but 
again with a 0.5 per cent benefit (i.e. KLIBOR + 3%). The bank may 
then arrange for swap agreements to be signed as shown in Diagram 5. 

Diagram 5: Rate Swaps between the “Islamic” Fixed Rate Market and 
the Conventional Floating Rate Market 




A enjoys absolute advantages 
in both markets 

The difference between the two here is 2 per cen 
Since A can borrow much more cheaply in the 1 
floating rate market, it therefore has a comparatF 
advantage in the floating rate market. 

The difference between the differences is 3% - 1% = 2%. This 2-1 
percentage point is the arbitrage “pie” that can be shared between the 1 
bank and both the corporations A and B in terms of lower borrowing] 

The way to go about this is by first determining which corporation 
has a comparative advantage in which market. In our example, 
corporation A has a comparative advantage in the floating rate market| 
while corporation B in the fixed rate market. Therefore, corporation . 
will borrow funds in the floating rate market at a rate of KLIBOR + 
0.5% while B borrows from the fixed rate market at 9 per cent (See i 
Diagram 5). Since both the parties are willing to sign a swap agreeme*^ 
if given a benefit of 0.5 per cent, the end result after the swap is that 
corporation A will end with a fixed rate but with a 0.5 per cent bencm 

4 ^Corp. A 

K + 0.5% 

Borrowing Cost after swap: 

Corp. B 


A: 7.5 per cent 

B: K + 3 per cent 

Corporation A borrows from the floating rate market at KLIBOR 
+ 0.5% and then signs a swap agreement with the bank where the 
bank will pay Corporation A the KLIBOR + 0.5% while A pays the 
' bank 7.5%. Therefore, the net cost to A is 7.5% fixed. Note that in 
'swapping no actual principal amount is .involved. Only the difference 
Tifin the rates will be settled among them. 

Corporation B borrows from the Islamic fixed rate market at 9 per 
cent and then signs a swap agreement with the bank where the bank 
g|ll pay Corporation B the 9 per cent, while B pays the bank KLIBOR 
[3, so that the net cost to B is KLIBOR + 3 per cent. 

^Note that while corporations^ and B were able to reduce their 
growing costs by 0.5 per cent each by means of swapping, the bank 
|tfle a spread of 1 per cent from the swap agreements (the bank paid 
BOR + 0.5 and 9 per cent but received 7.5 per cent and KLIBOR + 



Chapter Four 

3). Therefore, all the three parties were able to benefit from this 
arbitrage rate swap. 5 

This example shows the link between the fixed rate market and the 
floating rate market. Such arbitrage between the markets is likely to 
contribute towards a convergence between the Islamic and 
conventional banking systems. Note the dynamics of the Islamic 
banking system from its inception. Originally, it was meant to be a 
profit sharing banking. But later it concentrated on basically contracts 
that ‘lend’ money — murabahah, ijarah, etc. But to differentiate itself 
from conventional banking, it adopted fixed rate lending. Nonetheless, 
further convergence is forcing Islamic banks to move towards variable 
rate lending. Currently, Islamic banking seems to be concentrating on I 
bay ad-dayn , i.e. the buying and selling of debt. As a person trained in j 
finance, I view this as the ultimate convergence of Islamic banking 
with its conventional counterpart. 6 It is, therefore, not a surprise that 
when the interest rate changes, the Islamic bank changes its profit j 

rate. Since the Islamic banking system is relatively much smaller j 

compared to conventional banking, it is likely that the Islamic banking] 
system will converge towards the floating rate market. j 

Operating within the fiat money and fractional reserve 1 

requirement system, the Islamic banks also do create money out of a 
thin air but, nevertheless, lend out the money using Islamic principles! 

5 This principle is similar to the application of the concepts of absolute advantage andl 

comparative advantage in international trade. Countries are to produce items in j| 
which they have comparative advantage and then exchange them through trade. 1 
Such specialization and exchange benefits all parties. J 

6 Could we have talked about bay ad-dayn in 1983 during the initial phases of Islamic! 

banking? I tell my students that such arbitrage between the two banking systems I 
would ultimately bring about identical twins. With banks offering both conventional 
and Islamic windows, we should not be surprised if they take advantage of the a 
differences by arbitraging them away behind the windows. In this case we would .9 
have not only twins but Siamese twins. 9 

Islamic Banks and the Fiat monetary System 

Therefore, Islamic banks are also partly responsible for the numerous 
socio-economic problems created by the fiat monetary system, instead 
of being solution providers. 

Summary of Part One 

Part One basically pointed out that there is an inherent structural flaw 
in the current global fiat monetary system that is at the root of its 
instability and unjustness. The structural flaw is associated with the 
following three features of the current monetary system: 1) Fiat money, 
2) Fractional reserve requirement, and 3) Interest. Fiat money is money 
that is created out of nothing. It has neither intrinsic value of its own 
nor is backed by gold as it was in the gold standard. Since the collapse of 
Bretton Woods in 1971, all global currencies are fiat and are no longer 
backed by gold. The ability to create money out of nothing gives 
immense benefit to both the domestic and international financial 
institutions. The financial institutions create money out of nothing but 
lend it out at interest. This characteristic of fiat money called 
seigniorage is at the root of financial crises, monetary instability and 

unjustness. The fractional reserve requirement also makes possible the 
creation of additional money through multiple deposit creation. All this 
has brought about huge liquidity into the global monetary system 
which is responsible for the huge asset price bubbles faced in many 
countries. The Japanese bubble during the mid 80s and the Asian 
:;1$fracle of the 90s are examples of this. The burst of such economic 
" Rubbles, of course, brings about a contraction of the economy with a 
I st of other problems. While amplifying economic cycles along with 
e ir negative attributes like business failures, unemployment, etc. the 
^monetary system is also at the root of many social evils. At the 
‘rnational level, the fiat monetary system is a powerful tool for 


Chapter Four 

acquiring the wealth and sovereignty of nations unjustly, i.e. a tool for 
economic domination and colonization. While such is the characteristic] 
of the fiat monetary system, it is kept silent by both domestic and 
international financial institutions since the financial sector is the main 
beneficiary of the fiat money system. There are different ways this 
seigniorage of fiat money is used in the “theft” of nations. 

Money created through the multiple deposit creation (i.e. credit 
creation) by the banking sector is introduced into the economy as debt j 
— i.e. money equals debt — that carries interest charges. This, in turn, 
requires money stock (and thus debt) to constantly grow simply to 
sustain the system. Nonetheless, debt has implications for financial 
management particularly on corporate capital structure. Only a certain] 
maximum debt level is bearable, thereby placing the current global fiatj 
monetary system on weak foundations that are bound to collapse. 

The dollar that has played the role of the international reserve 
currency for the last few decades is now on the verge of collapse. Thisi 
because while a gigantic economic bubble has been created from its roj 
as a reserve currency, the creditworthiness of the United States is beinj 
questioned in the wake of record bankruptcies, corporate frauds and 
accounting irregularities that have marred corporate America in recent 
• years. If the dollar collapses, a global monetary meltdown as predicted! 
by some monetary experts may be inevitable, which, in turn, could 
push the world economy into its worst economic downturn in history 

Part Two discusses a way out for nations from the present unstabfl 
global financial and economic scenario. The idea is simple, i.e. to use] 
the opposite of fiat money, that is money that has intrinsic value of it 
own — real money or commodity money. A commodity that has a 
natural tendency to evolve as global money is gold. Gold had been u| 
as money in' one way or another since time immemorial until the 


Islamic Banks and the Fiat monetary System 

breakdown of Bretton Woods in 1971. Nobel Laureate Robert Mundell 
predicted that gold would again return as an international monetary 
unit in the 21st century. Accordingly, Part Two discusses models of 
gold payment systems for domestic use and international settlements. It 
argues that gold is capable of providing the stability and justice that are 
lacking in the fiat monetary system while at the same time providing a 
way for nations, particularly developing nations, to protect themselves 
from the “theft of nations” as discussed in Part One. 



Chapter 5 

The Gold Dinar Solution 

Verily with every difficulty there is relief. — Holy Qur’an (Sura Al-Inshirah, 94:6) 

THE PREVIOUS CHAPTERS highlighted the many problems faced in 
present day economies particularly by developing nations due to the 
very definition and nature of money — i.e. fiat money. Since fiat 
money comprises primarily accounting entries that have no intrinsic 
value, it is created easily and in certain circumstances is also destroyed 
easily. This “now-you-see-it-now-you-don’t” feature of fiat money 
pauses numerous problems for the economy particularly in the context 
of the stability and justice of the system. However, this system is 
c -beneficial to the minority in whose hands the control of the financial 
institutions rests. The system gradually accumulates wealth and 
Sovereignty into their hands. Interest rates also pose structural 
foblems in that they necessitate more and more fiat money to be 
^|fted in order to sustain the system, apart from causing wealth to 
|gculate among the rich in the society. Some of the socio-economic 

L»t. • 

‘felems caused or worsened by the fiat money interest-based system 
Mentioned on page 26. 


Chapter Five 

Can we solve the above problems, minimize or reduce their effects 
and thereby protect ourselves? Our answer is “YES”. If one analyzes 
the situation carefully, the source of all the above problems seems to be 
rooted in the fiat nature of money (i.e. money that is created out of 
nothing and hence has no intrinsic value) and interest rates, i.e. the 
seigniorage basically. Therefore, solutions must address both of these. 
Before we proceed further, it may be better to discuss the following: 

(a) the first principles, (b) the ideals and (c) the practicalities. 

The First Principles 1 

Trade, no doubt improves the economic well-being of mankind. With 
trade one is able to enjoy goods and services which otherwise one may 
not be able to produce oneself. A baiter economy 2 poses a number of 
problems. Double coincidence of wants is one of them. This refers to 
the problem of the need for one party to find a counter party who is 
willing to accept what one has and in return gives what one wants, in 
agreed proportions. Money solves the problems inherent in barter 
trade, promotes specialization, encourages trade and improves the 
overall well-being of people. 

Money is generally anything that is accepted as payment for goods 
and services or debt. Normally, people only refer to currency 
(consisting of paper notes and coins) as money but technically it is 
anything that is accepted for payment. In ancient times, people even , 
used rocks, leather, salt, shells, etc. as money. These were later replace' 
by precious metals like gold and silver which played the role of mone^ 

1 This section draws from die chapter “A Primer on Money and Economic 
Development” in Ahamed Kameel Mydin Meera, The Islamic Gold Dinar, Pelandu 
Publications, 2002. 

2 A barter economy is an economy without money where goods and services are 
exchanged directly for some other goods and services. 


The Gold Dinar Solution 

better. Since the demise of Bretton Woods in 1971, paper money and 
electronic money have become the dominant forms of money. 

The primary function of money in the economy is as a medium of 
exchange, i.e. money is used for paying for goods and services. This 
simple function is responsible for promoting specialization and 
accelerating trade among people; and thereby elevating their standard 
of living. The function of money as a medium of exchange brings 
about a high degree of economic efficiency. In a barter economy 
efficiency is much suppressed and thus the standard of living would be 
low. People in a barter economy get to enjoy very few things in life. 
Most of their time and economic activities would be directed towards 
the production of the basic necessities of life. 

With the introduction of money, the problem of ‘double 
coincidence of wants’ is eliminated. One sells goods or services for 
money then uses it to buy whatever goods and services one wants. Since 
money is divisible it makes the exchange of different quantities of items 
possible and simple. Money thus allows one to specialize in whatever 
one does best. This increases the productivity, quality and quantity of 
goods and services produced and exchanged in the economy. 

For an item to function effectively as money, it has to have the 
following five criteria: 

Standardizable such that its value can be ascertained easily. 

Must be widely accepted. This function needs money to be 
something rare with its own intrinsic value (or something 
made to be a legal tender). 

Easily divisible. <■ 

Easy to carry around, and 
Must not deteriorate quickly. 






Chapter Five 

A good monetary system should encourage the circulation of 
money rather than encouraging hoarding. In normal circumstances, 
the high velocity of money circulation would encourage increased 
production. Hoarding, on the contrary may slacken economic activity 
which may show up in the form of poor demand, low business 
profitability, unemployment, etc. 

The second function of money is as a unit of account. Basically, 
this refers to its use as a measure of value in the economy, e.g. the price 
of a shirt is RM45 or you owe me RM100 and so on. Money measures 
value just like the kilogram measures weight or the meter measures 
length. This is also an important function since it eliminates the need 
to quote barter exchange prices between every pair of goods and 
services that exist in the economy. 3 

The third function of money is as a store of value. This basically 
refers to the purchasing power of money over time. If money is a good 
store of value, then its purchasing power is preserved from the time 
money is received until it is spent. If RMl,000 today can buy a basket 
of goods, and if a year later it can buy the same basket of goods, then j 
money has been a good store of value in that year. Other items apart 
from money are also used as stores of value, e.g. investment in stocks,] 
property like houses and land, artworks, etc. In fact, many of these are' 
better stores of value than money itself since they usually give better 
returns than money. In contemporary financial systems, money is no 
a good store of value since its value generally falls over time, i.e. its 
purchasing power erodes due to inflation. 

3 In a barter economy, if there are one hundred goods, 4,950 pairs of prices need to 1 
quoted. "With money, however, the 100 items will have a price each, i.e. only 100 
prices in total. 


The Gold Dinar Solution 

The Ideals 

Part One of this book highlighted the problems inherent in the current 
monetary system. We postulated that the following characteristics, i.e. 
fiat money, the fractional reserve requirement and interest are at the 
root of the instability and unjustness of the fiat monetary system. The 
opposites of those three characteristics are of course: real money, 100 
per cent reserve requirement and a negative interest rate (e.g. a 
demurrage charge). A negative interest rate encourages money to be 
spent and kept in circulation rather than being hoarded. 4 The concept 
of the 100 per cent reserve requirement is also compatible with the 
concept of real money. A monetary system that adopts real money, like 
the gold dinar, and a negative interest rate is likely to alleviate the 
numerous socio-economic problems inherent in the interest-based fiat 
monetary system. This is discussed in the next section, but the real 
challenge is identifying and implementing actions and policies that can 
move us away from the present fiat money system to the ideal situation 
in a smooth manner without abruptly rocking the present set-up. 

Gold as Money 

The opposite to fiat money is, of course, real money, i.e. money that 
has intrinsic value. This necessarily has to be commodity money, i.e. 
money which itself is a commodity valued by people or money that is 
backed by such commodities. Therefore, the solution to the problems 
of the fiat monetary system seems to lie in commodity money. A 

4 Note that this concept is embedded in the Islamic principle of zakat. Zakat is a levy 
imposed on a Muslim’s wealth (above<a certain minimum) that has been in his or 
her possession for a whole year. For example, the Zakat for 20 dinars that have been 
in a Muslim’s possession for a whole year is half a dinar. This levy encourages the 
Muslim to invest and circulate the money. Zakat also increases aggregate demand in 
the economy because it is given to the poorer sections of the economy that have a 
higher marginal propensity to consume. 


Chapter Five 

number of solutions are currently being discussed examples of which 
include: (1) gold and silver money, (2) a basket of commodities as 
money, 3 (3) complementary currencies 5 6 and (4) Real Money Units 
(RMU). 7 In our opinion, any real money would, in one way or 
another, provide some solutions to the above problems. However, the 
most well-known commodity monies in the history of mankind are 
gold and silver. This book intends to discuss these, particularly gold, as 
a solution. There are some suggestions, though, to bring about stability 
by means of a basket of currencies. We shall briefly discuss this first. 

A Basket of Currencies 

Yes, a basket of currencies as a unit of account can be expected to bring 
about some degree of stability. This is because the volatility of a 
currency may be divided into two parts: one is due to internal factors, 
i.e. factors unique to the issuer country, while the other is due to 
factors common among countries. In a basket of currencies, the 
unique factors tend to cancel each other out providing diversification 
benefits similar to those of a portfolio of shares. In a well-diversified 
basket of currencies, only the common factors may affect the volatility. 
Therefore, a basket of currencies is likely to be more stable through 

5 Like Bernard Lietaer’s TERRA project. See Bernard Lietaer, and Gemot Nerb, 
“Terra: A Countercyclical Reference Currency to Stabilize the Business Cycle” in 
the Proceedings of the 2002 International Conference on Stable and fust Global Monetar)> 
System (Kuala Lumpur, August 19-20, 2002), International Islamic University 

6 Examples include the Austrian Worgle, Thai Bia, German WARA, Swiss WIR, New 
Zealand ‘Green Dollar’ and Local Exchange Trading Systems (LETS). For a 
discussion of these, see Bernard Lietaer, The Future of Money, Century, 2001. 

7 See Zakaria A. Bawany, “Interest and Loan Free International Trade Import & 

Exports through R.M.U.”, in the Proceedings of the 2002 International Conference on 

Stable and fust Global Monetary System (Kuala Lumpur, August 19-20, 2002), 
International Islamic University Malaysia. 


The Gold Dinar Solution 

lower volatility (See Diagram 6). A common currency like the euro 
may be expected to enjoy this since it can be viewed as a basket of 
currencies. However, as long as the currencies in the basket are fiat, the 
problems faced due to the fiat nature of money will still be present. If 
the basket of currencies exists together with other national currencies, 
then some exchange rates between them will be defined and hence still 
make speculation, arbitrage, etc. possible. Gold on the contrary, is like a 
unified currency of all nations. Thus, while providing a greater degree 
of diversification, it also solves the numerous problems faced in a fiat 
monetary system. 

Gold has played the role of money for many centuries in almost all 
civilizations. In fact, people of every race, creed and nationality have 
accepted it as the international medium of exchange that has intrinsic 
value of its own. However, before gold, some civilizations used many 
other items as money — cowry shells, leather and even salt to name a 
few. However, an interesting point to note is that in the passage of 
time, gold dominated all other forms of money, thereby taking on the 
position as the international unit of money. This is because gold 
possesses many characteristics that make it an ideal candidate for 
money: 8 

• Gold has intrinsic value such that people of every race, creed 
and nationality desire it for its own sake. One just has to look 
at the obsession humanity has had for this metal throughout 

• Rare. To be money, an item has got to be “rare” — something 
not easily obtained from nature or otherwise. 9 For example, 

For other basic facts about gold including its chemical and physical properti es please 
see Appendix G. 

On the contrary; today’s fiat money is easily created at “the stroke of a pen”. Today’s 
printing technology is also so advanced that counterfeiting can be easy too. 


Chapter Five 

while the cowry shell was used as money by civilizations 
where it was rare, it did not play the role of money in this part 
of the world where the shells were found in abundance. 

Gold is compact. A small amount of gold has big value. 
Therefore, one needs only small amounts for even large 
purchases . 10 

Gold is stable and durable. The chemical property of gold is 
such that it rarely reacts with any other element or compound. 
It is such an inactive metal that it is even extracted from the 
earth as gold itself (unlike iron, for example, that is obtained 
from the earth as iron oxide, which is then processed to extract 
the iron). Gold does not oxidize easily and, therefore, does hot 
get rusty. It remains stable and durable for very long periods. 
Even gold treasures buried in the salty seawater for many 
centuries remain in their pure form. 

Gold is homogenous and divisible. This characteristic is 
important since it allows the pricing of a whole range of 
values. It is homogenous in the sense that if a gold bar is cut 
into two halves, one need not choose between the two for they 
are simply equal. This splitting can go on until each unit is 
very small in weight. Gold is also homogenous in the sense 
that gold extracted from different parts of the world are 
practically substitutable for each other . 11 
Gold is storable. Therefore, it is an ideal store of value, i.e. 
something that can be saved for future use, even far into the 
future. Many fiat paper currencies and coins have become 
obsolete with the passage of time, but gold coins, on the 
contrary, not only maintained their intrinsic value, but they 
become more valuable over the years due to their numismatic] 

10 That it is cumbersome to carry gold around is not something to be truly concernedj 
about. If a gold chain worn around the neck is not a ‘pain -in-the-neck’, surely 
carrying it in the pocket shouldn’t be a problem. 

Sometimes people are concerned about the fact that gold from different parts of the 
world has different colours. This difference in colour is basically due to the other I 
metals added in order to form gold alloys. Please see Appendix G on “Some Basic J 
Facts about Gold”. 



The Gold Dinar Solution 

• Gold is mobile. It can be moved between places easily and, 
therefore, be used as money in different localities, e.g. for 
international trade. 

• Gold is not destroyed or consumed away in the process of its 
use. If people were to use wheat as money, for example, then 
when one consumes the wheat, money gets destroyed; this 
poses potential problems for the economy. 

• Gold can neithei be created nor destroyed. If money can be 
created or destroyed (as fiat money is) then it is certainly a 
potential problem for the economy. Inflationary problems 
may crop up when it is created, while recessions and 
unemployment occur when it gets destroyed. This is 
particularly the case with fiat money since it is created by the 
banking sector and gets destroyed in certain circumstances. 

Diagram 6: Stability of Gold Relative to Individual Currencies and a 

Basket of Currencies 

Individual currencies are volatile 

A basket of currencies is less volatile 
due to diversification benefits and 
thus is more stable 

Gold is even more stable due to 
greater diversification benefits but 
also has intrinsic value of its own 


Chapter Five 

It is not surprising, therefore, that with the above characteristics 
gold naturally dominated as the global currency in history. No one had 
to force others to accept gold as money unlike fiat money that had to 
be made a “legal tender”. 12 By the time of the advent of Prophet 
Muhammad (peace be upon him), gold coins of the Roman Byzantine 
empire were already in circulation and were fully accepted by the 
Arabian community. The gold coins of the Muslim world were called 
‘dinar’, a word derived from the Latin denarius . 13 While the Prophet 
(peace be upon him) brought many changes to the social institutions of 
the time, the dinar was, however, fully accepted as money. The first 
Islamic dinar 14 was not minted until about fifty years after the demise 
of the Prophet (peace be upon him), by the caliph Abd al-Malik ibn 
Marwan in 75 Hijrah (696 CE). The caliphs were very concerned over 
the quality of the gold dinar and imposed severe punishments for 
crimes like coin clipping, etc. As the Islamic world expanded, these 
precautions along with the high moral standards of the Muslims of the 
past, made the dinar the dominant and desired international currency, 
even replacing the bezant gold coin throughout Europe. The dinar 
remained the currency of the Muslim world for centuries until the fall i 
of the Ottoman caliphate in the early 20th century. The dinar is held as ] 
the Shari’ah currency by some Muslim scholars and is seen as being 
capable of promoting socio-economic justice. This book looks at gold I 

12 Since paper money and other fiat money has no intrinsic value, governments had to ' 

make their people accept them as money through legal means. This is what legal 
tender is all about. J 

13 The word dinar refers not to the shape of the coin or what is inscribed on it. Rather it j 

refers to a standard weight of gold, i.e. 4.25 grams of a gold alio y that contains 91.6 i 
per cent gold (also known as 916 gold or 22 Karat), just as the British sovereign that J 
weighs 8 grams (also of 91 6 gold) . J 

14 The Islamic dinar simply had the Roman pagan inscriptions removed and replaced | 

with Qur’anic verses instead. J 


The Gold Dinar Solution 

as a possible solution to the problems inherent in a fiat monetary 
system. Is gold capable of making a true difference? We argue that gold 
can, in one way or another, provide solutions to each of the problems 
identified earlier. 

A major advantage of gold over fiat money is that it has intrinsic 
value and that it can neither be created nor destroyed. Its issuance or 
production is also not a monopoly of any single party. Gold is scattered 
throughout the earth and can be mined by anybody unlike fiat money, 
the issuance of which is under the prerogative of some issuing bodies 
like the central banks and the commercial banks. The following section 
reasons why gold can be a solution to the problems. 

Superiority of Gold over Fiat Money 

We argued earlier that fiat money is easily created by the banking sector 
and that the growth in money supply is necessary for the sustainability of 
the system. Part One highlighted the many problems encountered in the 
interest-based fiat monetary system. Those problems may be matched 
with the characteristics of fiat money as summarized in Table 2. 

The gold dinar is not likely to be the cause of the above problems 
simply because it cannot be created the way fiat money is being created 
through multiple deposit expansion. Gold is, in contrast, physical and 
real. Therefore, it can neither be created at the will of anyone nor be 
counterfeited. This characteristic alone can obviate most of the 
problems associated with fiat money — hyperinflation, asset price 
bubbles, debt bubbles, amplification of business cycles, etc. 



Chapter Five 

Table 2: Characteristics of Fiat Money and Problems Caused 

Fiat Money is Created Out of Nothing 

1. Amplifies business cycles. 

2. Causes inflation and asset price bubbles. 

3. Debt bubbles and financial collapses of firms and governments. 

4. Trade-off between inflation and unemployment. 

5. Agriculture sector disadvantaged due to price controls in thissector. 

6. Along with interest rates, it places the burden of a continuous growth 
requirement, promotes competition and accumulates wealth in the 
hands of a minority by taxing the majority. 

7. Widening inequality in distribution of income that creates poverty 
with a host of social problems like housing, long working hours, 
multiple jobs, female and child labour, crime, etc. 

The Existence of Many Different Fiat Currencies 

1 . The many fiat national currencies currently existing provide a fertile 
ground for currency speculation, manipulation and arbitrage. 

2. Makes it possible for huge amounts of short-term funds to move in 
and out of nations within seconds. This fact is very destabilizing, 
sometimes behaving as a shadow government that apparently 
disciplines ‘misbehaving’ governments! 

3. Through the seigniorage of fiat money some nations gain 
substantially when other nations use their currency for international 
trade and dealings or in domestic transactions. 

4. Provides an easy tool for domestic and international financial 
institutions to gain control over the money, wealth, the political 
structure (i.e. sovereignty) of nations, etc. 

Gets Destroyed in Certain Circumstances 

1. Causes a shrink in money supply and aggregate demand, and thereby 

2. Business failures and unemployment during financial collapses. 

3. Bank failures and crises. 

4. Leaves governments in debt 

5. Possible political turmoil. 

The Gold Dinar Solution 

If gold were used as a common currency instead of the different 
national currencies, then there would be no exchange rates in the first 
place. Therefore, speculation, manipulation and arbitrage would no 
longer be possible. The possibility of the kind of currency attacks that 
the East Asian countries experienced in 1997-98 would be very much 
diminished. The additional benefits of using gold in international trade 
are discussed in the next chapter. 

Also if gold were to become a common currency, no individual 
country would enjoy substantial seigniorage. The '‘theft of nations” that 
we discussed earlier would be very much minimized, if not eliminated. 
Accordingly, gold protects the sovereignty of nations and thereby, in 
turn, also protects their culture, religion, education, legal structure, etc. 

During a recession, fiat money gets destroyed through the reverse 
process of money creation. Money that is initially created in the form 
of accounting entries, later gets destroyed in the same way. This 
destruction of money brings about a shrink in the money supply and a 
lower circulation of money in the economy which, in turn, causes 
lower demand and business transactions, lower business profits, 
bankruptcies, retrenchments, unemployment, etc. With gold as 
money, however, this destruction is not possible due to the physical 
nature of gold. Therefore, gold as money can be expected to provide 
the much desired stability missing in the current fiat money system. 
Unlike fiat money, gold would not be introduced into the economy in 
the form of debt. Therefore, it would neither create capital structure 

Of course, convincing all nations to adopt a single currency is easier said than done 
more so if gold is to be the money itself. 

Appendix D provides an example of how speculative and arbitrage profits in the 
currency markets are made. 


Chapter Five 

problems nor require constant growth in money and the economy for 
the mere sustainability of the system. 

Gold, therefore, seems to be a superior and desirable money 
compared to fiat money. It promises a just and stable monetary system 
while protecting the wealth, sovereignty, culture and religion of the 
people. A real money like gold is, therefore, also urgent in the current 
era of globalization and neo-liberalization. While countries are likely to 
gain from the implementation of gold money, the only parties that 
might lose out are those in control of the financial institutions, 
particularly the international ones, and the countries that enjoy 
immense seigniorage through their currencies. 

Some Common Objections to the Gold Dinar 

Even though we postulate that gold has numerous advantages, there are ; 


some who nevertheless do have reservations regarding the gold system, j 
Some even say that this is like taking people back through the centuries j 
to the olden days to a system that is no longer applicable to the modem j 
day scenario. Some common objections given are as follows: 

A. Gold Standard and Bretton Woods Both Failed! 

But both failed because some countries printed money considerably 
in excess of what their gold reserves could support. This meant that; 
a significant portion of their fiat currencies were not backed by gold 
The failure to match these brought about their collapse. 

B. Price of Gold Fluctuates 

Yes, the price of gold fluctuates for many reasons. But, this should , 
not be of much concern if people start to think of gold as the price 
itself. The value of gold is still much more stable than that of any j 
other currency including the dollar. 


The Gold Dinar Solution 

C. Gold Producing Countries at an Advantage 

This very common objection or query. Yes, gold producing 
countries would be at an advantage” but the gold needs to be 
mined first with some heavy investments. Additionally, this is the 
same as if God were to give one a fertile land that produces lush 
. vegetation and fruits. The produce of the land could then be 

exchanged for gold. Similarly, knowledge, skills and technological 

know-how are just as valuable. 

D. Gold is not Practical. It is Heavy and Entails Security Issues 

With information technology these problems can be minimized. 
Most transactions can be done electronically and the gold can be kept 
safe with a custodian. Accounting entries for the ownership of gold 
are all that is required. Gold can be transfeired only when necessa^. 

E. Gold Stock is Insufficient and Inelastic to Meet Growing 
International Trade 

As we argued earlier, in most cases gold would only play the role as 
a unit of account. Therefore, gold is needed only for settling the 
balances of multilateral trade among a matrix of countries. This 
fact is further elaborated in the next chapter. 

F. Fiat Money is Cheaper to Produce 

But it is the fiat nature of money that causes the many problems 
that were discussed earlier. 

G. New Discoveries of Gold May Cause High Inflation 

Actually, it is fiat money that can be easily created or counterfeited 
ence is more likely to cause, inflation. Gold production is not 
easy and entails heavy investment. Hence there are automatic 

" dollir is d ™ 

issuance. However 7o count™ hV “ enj ° yS * mon °P°'Y over its 

owever, no country has a monopoly over the production of gold. 

Chapter Five 

checks on overproduction since miners know that overproduction 
would only entail inflation, i.e. why waste investment and effort 
that would only translate into inflation? 

H. Gold Price is Too Volatile for it to be a Monetary Standard 
When the ringgit exchange rate relative to the dollar fluctuates, for 
example, it could be due to factors affecting the ringgit or even 
factors affecting the dollar or both. The volatility is not necessarily 
due to factors affecting the ringgit alone. Similarly, when the gold 
price fluctuates, it may not necessarily be due to changes in the 
demand and supply of gold, but it could be due to changes in fiat 
money itself If the gold price goes up, it could also mean that the 
value of fiat money is falling. For example, if a government prints 
too much of its currency, then the gold price in that currency 
would rise. Nevertheless, historically, gold has proven to be more 
stable than most currencies including the dollar, in terms of 
keeping its value. 18 

I. Gold is Incompatible with the Current International Monetary 

Histoiy has shown that gold is a globally acceptable currency and 
hence more compatible with the international monetary order 
than any fiat currency. 

18 For example, Roy W. Jastram, Ue Golden Constant , New York, John Wiley & Sons 
1977, showed that price levels based on gold were extremely stable over long periods 
of time. Using wholesale price index data, Professor Jastram concluded that this was 
not because gold moved towards commodity prices, but because commodity prices 

eventually returned to gold. 


The Gold Dinar Solution 

j. Now is an Inopportune Time Since Developing Nations will 
lose their Gold Stock 

Looking at the current global scenario, now is the time to 
implement the gold system. The idea behind the gold payment 
system is to use it as a monetary unit of account as much as possible, 
i.e. use gold to settle net trade balances only. This is further 
elaborated in the next chapter. As such, the gold dinar would at least 
protect the future wealth of nations being unfairly plundered. 


The Prophet Muhammad (peace be upon him) is 
reported to have said that: “A time is certainly coming 
over mankind in which there will be nothing [left] which 
will be of use save a dinar and a dirham”. 19 

We believe that that time is veiy close, in the very near future. In our 
opinion, the use of gold in settling international trade balances is a great 
step forward. For Muslims, it would be a significant step that 
complements the establishment of the Islamic Banking system itself. 

The gold dinar promises a just and stable global monetary system while 
providing a stable international unit of account, which has been 
profoundly missing since the demise of Bretton Woods in 1971. It 
promises to check excessive currency speculation, manipulation and 
arbitrage while reducing transaction costs. Most importantly, it promises 
to protect countries from the threat of losing their national wealth and 
sovereignty to foreign financial powers through the interest-based fiat 
money system. In the current system, the Islamic bank is also caught up 
m the law-of-one-price that causes it to refer to the market interest rate 
the very thing it was supposed to avoid — in designing and pricing its 
financial products. Tan Sri Nor Mohamed Yakcop, the special economic 

Musiiad of Imam Ahmad ibn Hanbal. 


Chapter Five 

adviser to the Prime Minister of Malaysia, rightly called the gold dinar 
the next component in the international Islamic financial system. The 
gold dinar seems truly to be the missing link that is necessary to perfect 
Islamic money, banking and finance. 

Practicalities . 

A gold payment system needs to be implemented in a gradual manner. 
One cannot and should not attempt to overturn the present system 
overnight. Therefore, a practical way to introduce a gold payment 
system is to begin with a dual system, i.e. the gold dinar co-existing 
with the national currencies. This is desirable considering the fact that 
not every individual may favour a gold payment system . 20 The best 
area to start is probably to implement the gold dinar for settling 
bilateral and multilateral trade arrangements. This would have the least 
implications for the existing national currencies. Concurrently, a small 
but parallel gold dinar economy should be established. This refers to a 
set of businesses that accept gold for payments in the domestic 
economy. This gold economy would form the nucleus for the 
implementation of a gold payment system domestically. This is further 
discussed in the next section. 

20 Disagreement on this matter is, therefore, a blessing. Those who disagree need to be 
convinced by a working and successful implementation. Their gradual acceptance 
would also provide the gradual growth necessary for a smoother transition. 

The Gold Dinar Solution 

Colonialism and Financial Liberalization^^^~ 

0f “‘ onialism? BasM y. *e colonialists were the 
true rulers of the countries they colonized. They set the laws rules 


money interested " d 3 finanC,al S ? SKm that is a fiat 

understand how *1 fia, mon^”!^ globalization 

succeeds in bringing in foreign banks to operate in the land then it ,*« ™ i 
a matter of time before the national wealth and sovereignty will fall into the 7 
hands of foreign financial institutions. With sovereign tv Inch i ■ 

muons wil, be back to the olden days of coSK.Is tel" ? 
colonialists Will be much more powerful. Every citizen will be basically | 

nansformed into a “slave”. The interest rate will determine the ‘W ra^ 

This ,s necessarily a huge ufti because even a small interest nteoBpeTen. 

T“ enK a ,ai F a " K>um ofthe raI economy! 2 ' Not only will the ? 
developing nations be paying the ufii, but vital decisions vrill be made by the 
oJonialists including, he lawofthe nation, the education systeTand even 

some . C ° l0 " ,al,sts of the P“* w «e able to obtain such power only after 
some serious confrontations like battles, wars, etc. However today the 

financial system provides an easy and convenient tool. Y 

rnlnJ i ' mpend T f ‘ nancial liberalization will effectively transfer such 
colon I power to tile financial institutions “peacefully”. The peopL mM be 
basically nansformed into “slaves” who have to give to the coSlte 
^ruon of their produce and take orders from them with respect to laws 

theref 0 "’ llberaIizati on within the fiat money framework’is I 

erefore, a tool forglobal colonization. Nothing ofthe pjt can match it ’ I 

better sandard^ff” KSOmethin « S° od . e -S- * * provides the people with 
better standards of hvmg m terms of wealth, education, heal*, etc. with the ! 


Because money is predominantly introduced into the economy as loans. 

Chapter Five 

freedom to practice religion, etc., it maybe accepted by the people. However, 
what we see is that it is likely to impose Western secular culture on the 
people. The religion and culture of the people are likely to suffer under this. 

A spiritual vacuum may ensue with religious rulings like the Shari’ah reduced 
to mere history. 22 Basically, life will be transformed into a life of materialism 
with periodic “ ufti ” being paid to the colonial masters. 

If, in the past, such powers were basically acquired through battles and 
wars, by analogy, financial liberalization is war. 23 The gold dinar breaks the 
very foundation of the tool for colonization, i.e. the fiat money. It 
significantly reduces the reliance on foreign reserve currencies for trade. Gold 
places strong resistance against economic colonization. The developing world 
may thus unite on the gold dinar and reap all the benefits of a common global 
currency that has intrinsic value on its own. Gold money and trade 
settlement mechanisms using gold are means by which this new economic 
colonialism can be prevented. 

Implementing the Gold Dinar 

The earlier sections discussed the advantages of the gold dinar over the 
fiat money system. One particular issue of importance is the matter of 
sovereignty. The sovereignty of developing nations is at stake ifi this 
era of globalization and neo-liberalization as it has never been before. 
Therefore, it is imperative for nations that want to protect their 
national wealth and sovereignty to plan-out a defence strategy in the 
current global economic and financial chaos. Implementing the gold 

dinar is surely one strategy in this respect. 

The gold dinar may be implemented in two areas: (1) foi settling 
external trade balances and (2) for use in internal domestic transactions 

22 They may even forbid the hijab for Muslim women while the azan is considered as 

“noise pollution”. _ 

23 Malaysia, for example, could have lost this war in 1997 if it had only accepted the 
IMF loan oftcr. It is, therefore, a Blessing of God that Malaysia refused and decided 
on her own course of recovery. Some neighboring countries that understand this 
war had already accepted defeat by declaring that they would go along with the new 
world order”. Will the foreign financial giants try again on Malaysia? Yes, likely so. 
The 2007 financial liberalization looming over Malaysia is surely a threat in this 


The Gold Dinar Solution 

(See Diagram 7). Since the gold dinar touches the very structure of the 
current financial system, it would certainly be prudent to implement the 
gold dinar in a more gradual and carefully structured manner. Rushing 

Diagram 7: The Gold Dinar System inay be Implemented in Two 
Areas: For Domestic Transactions & External Trade 

The gold dinar may be implemented in two areas: (1) In external 
U-ade for settling trade balances between countries and (2) For use in 
domestic transactions, i.e. for payment purposes. 

The former may not have much implication for the national 

'f 0nly , re P laces international reserve currencies 
lrke the US dollar. The latter, however, will have implications for the 
national currency since in this case gold would be its complement. 

into its implementation in both the areas may even prove disastrous. A 
gradual shift without unduly rocking the present set-up is important. 
The Prime Minister of Malaysia, Dr Mahathir Mohamad proposed that 
the gold dinar be initially used for settling bilateral trade balances alone. 
This is the area that warrants immediate attention anyway, since most 
currency trading for real transactions take place in this sector. 
Implementing the gold dinar here would also curb the huge currency 
speculation that takes place globally. Later, the bilateral structure may be 
expanded into a multilateral set-up .lln this way, problems could be 
ironed out while they are still small. In an incremental manner, more 
and more commies could then be added into the gold dinar structure. If 
the system is implemented on a large scale immediately, the danger is 


Chapter Five 

that it may place an undue demand pressure on the existing international 
gold market and thereby cause a substantial increase in gold price. 
Furthermore, considering the present global economic and financial 
conditions this is not advisable for it could even cause a collapse of the 
dollar. The price of gold and the dollar index have a marked negative 
correlation as shown in Diagram 8 below. Nevertheless, a collapse of the 
dollar is not good not only for the United States but also for the rest of 
the world since many nations are currently holding on to the dollar as 
the reserve currency and have investments in the United States and in 
dollar denominated financial assets. 

Diagram 8: Negative Correlation between Gold Price vs US dollar Index 
















January 1995 US$ Gold Price February 2002 

US Dollar Index 

The plot uses monthly data ofgold price (US$/ounce) and the US 
dollar Index for the period January 1995 to February 2002. The negative 
correlation between the two series is quite obvious even to the naked eye. 
The Pearson’s correlation value is a negative 0.88. This high negative 
correlation between the gold price and theUS dollar suggests that if the 
gold price were to increase suddenly due to the implementation of the 
gold dinar on a large scale, it may prove detrimental for theUS dollar. 


Chapter 6 

The Gold Dinar 
in International Trade 

Gold ts going lobe part of the structure of the international monetary system for the 21st 
century. — Robert A. Mundell, Nobel Laureate - 

Implementing the Gold Dinar in Bilateral Payment Arrangements 
(BPAs) and Multilateral Payment Arrangements (MPAs)' 

MANYPEOPLE ARE convinced that the gold dinar system is desirable. 
However, the question now is how to implement it in the present fiat 
money system. As mentioned earlier, it is always wise to implement 
any new system gradually so as not to rock the present set-up 
drastically. Abrupt changes may cause more harm than good. With 
small changes, one may be able to monitor the impact of the changes 
and take necessary action where needed. Problems could be ironed out 
while they are still small, before embarking on further developments. 
Implementing the gold dinar in international trade, as proposed by Dr 
Mahathir Mohamad, is probably the best initial step that can be taken. 
In the Malaysian case, the gold dinar is not intended to replace the 

t , c ° n rnakes use of materials presented by Tan Sri Nor Mohamed Yakcop 

the special economic adviser to the Prime Minister of Malaysia, in a keynote address 

hellr^ a V T e 2002 Intemational Con ference on Stable and Just Global Monetary System 

held in Kuala Lumpur on August 19 - 20 , 2002 . ' 


Chapter Six 

ringgit, which will continue to play its role in domestic transactions. 
Basically, the model is as follows. 

In the bilateral and multilateral trade settlement systems, the gold 
dinar need not exist in its physical form. However, the external trade 
will be denominated in dinar, i.e. a standard unit of weight of gold. 
The historical dinar was equivalent to 4.25 grams of gold. For 
convenience though, we may denominate one ounce of gold as the 
standard international trade dinar simply because currently the 
international gold price is quoted in dollar per ounce. 2 For example, if 
one trade dinar is equivalent to one ounce of gold, and the price of one 
ounce of gold is at US$300, then the value of one gold dinar will be 
US$300 or equivalent in other currencies, on the basis of the then 
prevailing real-time exchange rates. 

The central banks of participating countries would play pivotal 
roles in the implementation of the gold dinar in the bilateral and 
multilateral trade settlement mechanisms. All external trade 
transactions pass through the central banks that keep the trade 
accounts. Exporters will be paid in their own national currencies by 
their respective central banks on the due date of exports, based on the 
gold dinar exchange rate prevailing at the time of the transaction. 
Similarly, the importers will pay to the central bank in their respective 
national currencies. These are intermediary steps towards a total gold 
system. In the ultimate system exporters and importers should be paid 
in gold itself. Only then can the exchange rate risk be totally 
eliminated. Another important point to note is that, when exporters 
are paid in high-powered national currencies, this would spin offa 

2 This follows the suggestion given by Tan Sri Nor Mohamed Yakcop. Some people 
might object to this, insisting that the Islamic dinar must be 4.25 grams of gold. 
Denominating it in ounces would not change the essence of things though. 


The Gold Dinar in International Trade 

chain of credit creation. Therefore, countries with current account 
surpluses (i.e. nade surpluses) would tend to experience credit 
expansion and asset price bubbles. 3 Such a set-up may even prove 
detrimental in a gold dinar system particularly when currently the gold 
price is expected to continue to rise. 

On the ground, commercial banks that support gold accounts would 
be viable partners in the implementation of the gold dinar. Individual 
businessmen, corporations and traders would deal with commercial 
banks that support such gold accounts. These commercial banks would, 
in turn, deal with the central bank for their respective gold accounts. The 
structure may sound like the gold standard of the past, but it is not. 

Here, gold itself is used for pricing and not any instrument backed by 
gold. Also with today’s information technology, physical movement of 
gold is not necessary. The historical gold standard failed because \f\ ' 
instruments backed by gold are vulnerable to easy abuse, i.e. some US 
countries created more instruments (i.e? paper money) than the amount 
of gold they actually had. Hence it is the fiat portion that brought about 
the collapse of the system. We cannot afford to repeat this failure in the 
gold dinar system. There must be real-time audit to make sure that the 

amount of gold being transacted (electronically or otherwise) matches 
the actual amount of gold held. 

Bilateral Payment Arrangement (BPA) 

The BPA gold dinar model is shown in Diagram 9. When Malaysia 
trades with Saudi Arabia, for example, the gold accounting is kept 
through the medium of the central Hanks and only the net difference 
between the two is settled periodically byway of transfer of an 

3 As experienced byjapan, East Asian countries and now China. 


Chapter Six 

Diagram 9: Gold in Bilateral Trade Model 


Saudi Arabia 

Exports and Imports 

Central Bank Central Bank 

Commercial Banks 



Exporters/Importers ^ ^ 

periodically among the Central Banks 
through a gold custodian account 


Exporters and importers (circles) would deal with commercial banks 
(squares) that support gold accounts. All external trade 
through the central banks (cubes) that keep the trade accounts. Thenet 
difference between the two is settled penodrcaly by way of transfer 
equivalent amount of gold. A physical transfer of gold from °ne country 
to another is not necessary though but only a transfer of beneficial 
ownership in a gold custody's account (cylinder). Any gold that needs 
to be settled can always be brought forward and used for future 

transactions and settlements. . , , • 

If exporters are paid in their own national currencies by th 
respective central banks on the due date of exports, based on the gold 
exchange rate prevailing at the time of he transacnon the central banks 
must be wary of the credit creation this would bring about domestical y, 
more so in the current scenario that is bullish on gold. 


The Gold Dinar in International Trade 

equivalent amount of gold. Hence every transaction in essence 
involves gold “movement”. A physical transfer of gold from one 
country to another is not necessary though, but only a transfer of 
beneficial ownership in a gold custodian’s account. 

The custodian role can be played by the Islamic Development 
Bank (IDB), the Bank of England or preferably by some other non- 
interest-based non-money-creating institution. The role of the gold 
custodian should decrease the probability of default by any of the 
parties involved, increase efficiency and thereby bring confidence into 
the system. However, any gold that needs to be settled can always be 
brought forward and used for future transactions and settlements. 
Where it is not possible to transfer the gold, payment can be made by 
way of an equivalent amount in other acceptable currencies using real- 
time gold price as the exchange rate. 

As an example, 4 consider that Malaysia and Saudi Arabia sign a 
bilateral payments arrangement where trade balances are to be settled 
every three months. Say, in a particular three-month cycle, Malaysia 
exports 2 million gold dinar worth of goods and services to Saudi 
Arabia while importing 1.8 million gold dinar (See Table 3). Hence 
Malaysia has a surplus trade of 0.2 million gold dinar with Saudi Arabia 
and Saudi Arabia needs to settle only this difference of 0.2 million gold 
dinar. The actual payment can be byway of the Saudi Central Bank 
transferring 0.2 million ounce of gold in its custodian’s account, say, in 
the Bank of England in London, to Bank Negara Malaysia’s account 
with the same custodian. The important point to note here is that, 

4 This example is from Tan Sri Nor Mohamed Yakcop, “Trade and the Gold Dinar: 
The Next Component in the International Islamic Financial System”, a keynote 
address presented at the 2002 International Conference on Stable and Just Global Monetary 
System, Kuala Lumpur, August 19-20, 2002. 


Chapter Six 

Diagram 9: Gold in Bilateral Trade Model 


Saudi Arabia 

XT, „ T *■" 

Central Bank Central Bank 



Exporters/importers -“^ed Exporters/Importers 

periodically among the Central Banks 
through a gold custodian account 

Exporters and importers (circles) would deal with commercial banks 
(squares) that support gold accounts. All external trade transactions pass 
through the central banks (cubes) that keep the trade accounts. The “1 
difference between the two is settled penodicaly by way of transfer 
equivalent amount of gold. Aphysical transfer of gold from one ^country 
to another is not necessary though, but only a transfer of 
ownership in a gold custodian's account (cylinder). Any gold that needs 
to be settled can always be brought forward and used for future 

transactions and settlements. , . ■ 

If exporters are paid in their own national currencies by their 

respective central banks on the due date of exports, based on the gold 
exchange rate prevailing at the time of 4ie transaction, the central banks 
must be wary of the credit creation this would bring about domestical y, 
more so in the current scenario that is bullish on gold. 


The Gold Dinar in International Trade 

equivalent amount of gold. Hence every transaction in essence 
involves gold “movement”. A physical transfer of gold from one 
country to another is not necessary though, but only a transfer of 
beneficial ownership in a gold custodian’s account. 

The custodian role can be played by the Islamic Development 
Bank (IDB), the Bank of England or preferably by some other non- 
interest-based non-money-creating institution. The role of the gold 
custodian should decrease the probability of default by any of the 
parties involved, increase efficiency and thereby bring confidence into 
the system. However, any gold that needs to be settled can always be 
brought forward and used for future transactions and settlements. 
Where it is not possible to transfer the gold, payment can be made by 
way of an equivalent amount in other acceptable currencies using real- 
time gold price as the exchange rate. 

As an example, 4 consider that Malaysia and Saudi Arabia sign a 
bilateral payments arrangement where trade balances are to be settled 
every three months. Say, in a particular three-month cycle, Malaysia 
exports 2 million gold dinar worth of goods and services to Saudi 
Arabia while importing 1.8 million gold dinar (See Table 3). Hence 
Malaysia has a surplus trade of 0.2 million gold dinar with Saudi Arabia 
and Saudi Arabia needs to settle only this difference of 0.2 million gold 
dinar. The actual payment can be by way of the Saudi Central Bank 
transferring 0.2 million ounce of gold in its custodian’s account, say, in 
the Bank of England in London, to Bank Negara Malaysia’s account 
with the same custodian. The important point to note here is that, 

4 This example is from Tan Sri Nor Mohamed Yakcop, “Trade and the Gold Dinar: 
The Next Component in the International Islamic Financial System”, a keynote 
address presented at the 2002 International Conference on Stable and Just Global Monetary 
System, Kuala Lumpur, August 19-20, 2002. 


Chapter Six 

under this mechanism, a relatively small amount of gold (0.2 million 
gold dinar) is able to support a much larger trade value (3.8 million 
gold dinar). In other words, we optimize the use of foreign exchange. 
Even countries with little or no foreign exchange reserves can 
participate significantly in international trade under this mechanism. 

Table 3: Gold in Bilateral Payment Arrangement ( BP A ) 

Export to 

Saudi Arabia 

Gold Dinar (million) 

Malaysia Saudi Arabia TotalExgo 




Gold Dinar (million) 

Import Net payment 




- 0.2 

However, the amount of 0.2 million gold dinar could be used for 
set tlin g future trade imbalances between the countries and hence a 
physical gold transfer between the countries is not necessary. This 
simple structure considerably reduces, if not eliminates, exchange rate 
risk. At this juncture, one may ask the question, how does this 
structure differ from a simple barter trade between the countries? The 
advantage here is that gold acts as a unit of account and thereby 
eliminates problems associated with barter. 


The Gold Dinar in International Trade 

Multilateral Payment Arrangement (MPA) 

The MPA structure is similar to the BPA, but it involves more than 
two countries and, therefore, makes the whole system more efficient. 
Let’s illustrate this using three countries, namely Malaysia, Saudi 
Arabia and Egypt. Let us assume that the volume of trade between 
Malaysia and Saudi Arabia was the same as in the BPA example, and 
we add the additional trade of these two countries with Egypt, as 
shown in Table 4 below: 

Table 4: Gold in Multilateral Payment Arrangement (MPA) 

Export to 


Gold Dinar (million) 
Saudi Arabia Egypt 

Total Export 






Saudi Arabia 










Total Import 





Gold Dinar (million) 



Net payment 





Saudi Arabia 








Now a total trade of 10.7 million gold dinar takes place among the 
three countries but with a net payment of only 0.1 million gold dinar. 
The only payment required is for Egypt to pay Saudi 0.1 million gold 


Chapter Six 

This mechanism can be refined further, whereby the credit or 
debit outstanding at the end of each quarter is forwarded to the \ 
subsequent quarters and the final settlement is made only at the end of 
the year. The advantage of this is that a net import position for a 
country during a particular quarter may be offset by a net export 
position in the subsequent quarter, so that, for the year as a whole, the 
payment flows are further minimized. 

The above example answers the often asked question: Are the 
existing gold reserves enough to support the growing volume of 
international trade? The answer is that in most cases gold would only 
play the role of a unit of account. Only the net balances remaining in 
the matrix of trade need to be settled in gold. David Ricardo, the 
famous 19th century economist, wrote in his Principles of Political 
Economy and Taxation (London, 1817), that when money is working at 
the peak of efficiency, the central bank need not hold any gold. We 
may not expect such peak efficiency, but some gold should be there to 
settle balances. Nevertheless, central banks need not hoard large 
amounts of gold like in Fort Knox. The efficiency could be further 
improved if trade experts sit together and analyze the export potentials 
and import needs of every participating country and thereby come up 
with a more efficient trade matrix. 5 The international financial 
institutions may not favour such multilateral payment arrangements 
because they significantly reduce the participating countries’ 
dependence on international fiat reserve currencies. 6 

5 Ahamed Kameel Mydin Meera and Moussa Larbani, “The Gold Dinar in 
Multilateral Trades: A Mathematical Model for Determining an Efficient Trade 
Matrix” provides a non-linear mathematical programming method to determine an 
efficient trade matrix that minimizes the amount of gold needed for settling the 
multilateral trade balances. 

6 Hence do not be surprised if these financial instit utions object to MPA’s on top of a 
possible objection to the use of gold for trade settlements. 


The Gold Dinar in International Trade 

In summary, therefore, for the implementation of the gold dinar 
system, central banks need not stock up gold reserves as suggested by 
some international agencies. It would be better to start small with 
whatever gold reserves are already in the possession, of a small group 
of participating countries. Countries with little gold reserves could 
trade with gold producing countries like South Africa, Mali, Russia 
etc. m order to increase their gold reserves. In this way, problems can 
be tackled while they are still small without placing undue demand 
pressure on the existing gold market. If all developing countries rush 
mto implementing the gold dinar, this may only increase the 
international gold price substantially. However, observing the present 
g lobak financial scenario, in our opinion, it is better for countries and 
individuals to have a good portion of gold reserves and savings. 

The Bilateral and Multilateral Payment Arrangements may not 
affect the national currencies much since the gold dinar only replaces 

t e international reserve currencies like the US dollar for settling 
international trade. 

Advantages of the Gold Dinar System in Multilateral Trade 

The bilateral and multilateral payment systems using the gold dinar 
have numerous advantages that are summarized below: 

1. Substantially reduces, if not eliminates, foreign exchange risk 
Accordingly, the gold dinar also removes the need for 

rilSnl VatiVe markMS f ° r hedgm S ^ inst change «te 

ge rates are so volatile that many international 
investments, trade and projects are shelved sLply due to the 
unwillingness of parties to assume the exchange rate risk. 

7 ^daJjnar^ COm * >arcs CUITen< T risk hedging using forwards, futures, options and the 


Chapter Six 

Traditionally, the currency forward, futures and options 
contracts have been used for managing currency risk. ^ 
However, in most developing nations including Malaysia, 
futures and options on currencies are not available. Even in 
countries where currency derivative markets exist, however, 
for example the Philadelphia Stock Exchange in the United 
States, not all derivatives on all currencies are traded. 

Derivatives are available only on select major world currencies 
like the yen, pound sterling, Australian dollar, etc. against the 
US dollar mostly. For most other currencies of the world there 
are no formal tools for hedging foreign exchange risk — a risk 
that has become immensely significant in today’s global 
business environment. With the gold dinar, nevertheless, all 
countries including those without derivative markets can 
enjoy this benefit. After all, developing a derivative market is 
not only costly but time consuming. It also introduces 
inefficiency into the market since additional transaction costs 

need to be incurred. , 

2 Unlike the forward, futures and options markets, the gold 
dinar does not depend on speculators for increased liquidity. 

By being a global currency it is capable of providing the 
needed liquidity without bestowing any “unfair” seigniorage 
on any particular currency. 

3. Also, unlike imperfections of hedging that are likely to occur 
with forward, futures and options contracts due to the 
standardized nature of these contracts, the gold dinar does not 

introduce such imperfections. . 

4. A hedger also pays neither the initial margin nor daily vanation 
margins as is the case with currency futures. Such margins are 

potential cash flow burdens on hedgers. 

5. The gold dinar would also reduce speculation, manipulation 
and arbitrage between national currencies. For example, if 
three countries agree to use the gold payment system, then it 
tantamount to the three currencies becoming a single 
currency. Accordingly, speculation and arbitrage among these 
three currencies will be reduced, if not eliminated. This 
"unification” of the three currencies through gold provides 


The Gold Dinar in International Trade 

diversification benefits. This is like obtaining diversification 
through a portfolio of stocks. Individual currencies face risks 
that are unique to the issuer country. Political turmoil, for 
example, can cause a national currency to depreciate, but in a 
unified currency such unique risks would be diversified away 
Since gold is treasured globally, it is a suitable global currency 
that enjoys global diversification. This means that no single 
country’s unique risk may be significantly embedded in gold. 
A basket of currencies is generally less volatile than the 
individual currencies — an advantage the euro can be expected 
to enjoy. However, the gold dinar is even better than the euro 
because it has intrinsic value unlike the latter and is also likely 
to hold its value better (as it has always done). 

6. The gold dinar is likely to reduce transaction costs too, since 
only accounting records need to be kept. Transactions can be 
executed by means of electronic mediums at minimal cost In 
a comprehensive dinar system, one no longer needs to incur 
currency exchange transaction costs (i.e. the different buying 
and selling rates for currencies) 8 or even face exchange rate 
risk. This would surely encourage trade. 

7. With increased trade, a smaller amount of gold is needed to 
support the gold payment system since gold would, in most 
cases, play the role of a unit of account. Therefore, even 
countries without foreign reserves can still trade. 

8. With less reliance on international reserves for trade, there 
would be less reliance on foreign debt too. 

9. With increased trade, one could expect improved unity and 

cooperation in education, science, technology, research 
defence, etc. 

10. Since in the initial model the gold dinar simply replaces 

foreign reserve currencies, therefore, it has few implications 
on the national currency. 

11. Gold has held its value stable throughout history, and is also 
tree from obsolescence. 

Also known as the bid and ask quotes. 


Chapter Six 

12. With the gold dinar there will be neither creation nor 
destruction of money; a characteristic of fiat money that 
amplifies business cycles, unemployment, etc. This also greatly 
reduces the possibility of future attacks on currencies, j 

13. There are numerous other socio-economic advantages but 
most important of all it promises to protect the sovereignty, 
wealth and culture of developing nations from the predatory 
forces under the pretext of globalization and liberalization, that 
can only result in economic and cultural colonization. 

14. It basically places an “iron-grill” so that the resources and 
future economic production of developing nations are not 
easily plundered by foreign forces through the easy means of 
seigniorage and interest charges. 

It is interesting to note that some early scholars of the past seem to 
have had great insight into this. Consider, for example, Al-Ghazalli, 

Ibn Khaldun and al-Maqrizi who asserted that God had created gold 
(and silver) to serve as a measure of all commodities. 

There are some important things to be wary of when 
implementing gold in international trade and transactions: 

1. Never reschedule or revalue old trade balances and loans in 
terms of gold. This is very important. The gold payment 
system must be made applicable only for new wealth creation, 
i.e. new production, new trade, etc. It should not be applicable 
for past economic activities and transactions, i.e. past trade 
balances, past loans, etc. This is because, for example, past total 
loans are huge simply as a result of the over-creation of fiat 
money. These enormous loan balances cannot and should not 
be transformed into gold equivalent, for this would be 
tantamount to realizing the seigniorage of past fiat loans. 

2. If exporters and importers are dealt with in national currencies 
while the central banks settle among themselves in gold, then 
the central banks must be wary of the spiral of credit creation 
and asset price bubbles this arrangement can bring about. 

the geometrical pattern shown below is a symbolic representation 
o a multilateral trade arrangement between 16 countries. Each line 
represents a bilateral payment arrangement (BPA) between two 
countries. Collectively they form a multilateral framework. 

From an engineering perspective such a sttucture must be 
necessarily strong and stable. The symmetry of the structure 
symbolizes fairness and justice. 

A Short Quiz: Can the reader figure out how many bilateral 
arrangements there are among the 16 countries? Put in another 
way, how many lines are there in the above diagram? 

(Answer on next page.) 


Chapter Six 

Answer: 120. It takes two points to make a straight line. Therefore the question 
is basically how many combinations of two are possible from the sixteen 

points. \6C 2 = ^j = 120 


Chapter 7 

The Gold Dinar 
in Domestic Transactions 

You have a choice between the natural stability of gold and the honesty and 
intelligence of the members of government. And with all due respect for those 
gentlemen, I advise you, as long as the capitalist system lasts, vote for gold. 
— George Bernard Shaw (1856-1950) 

THE preceding section discussed the use of the gold dinar in 
settling bilateral and multilateral trade balances among participating 
countries. However, the gold dinar model would not be complete 
until it is also used for domestic transactions within the country. It is 
true, however, that the use of the gold dinar in domestic transactions is 
likely to affect the national currency. Nevertheless, considering the 
present global economic scenario and the socio-economic benefits that 
can be derived from the gold dinar, perhaps countries should plan 
towards its gradual domestic implementation. Initially, the gold dinar 
may co-exist together with the conventional national currencies. It 
need not replace existing national currencies but rather it should give 
everyone a choice for their preferred money — gold dinar and/or 
national currency. This is also in line with the true definition of 
money: Money is an agreement (and not a legal tender) among people to use 
something as a medium of exchange. The gold dinar is dear to many 
Muslims who regard it as the Shari’ah money. If this choice is not 

Chapter Seven 

given, then the gold dinar will have little chance of successfully 
circulating in the economy. This is according to Gresham’s Law that 
states that bad money drives out good money from circulation. The 
domestic implementation of the gold dinar is important if we are to 
solve the internal problems created by fiat money. The amplification of 
business cycles, unemployment problems, inflation, widening 
inequality of income distribution, poverty, gradual transfer of political 
power to the financial institutions, etc. are rooted in the process of 
monetary expansion and destruction of fiat money. 

Most money that exists in an economy is created by the 
commercial banks through multiple deposit creation. In almost all 
countries, only a small portion of their monetary aggregates is state 
money or money issued by the governments in the form of paper 
currencies and coinage (Please see Appendix E). The rest is 
predominantly bank money that simply comprise accounting entries. 
In many cases, even governments borrow money from the banks at 
interest whereas the issuance of money should in the first place rest 
within the domain of the governments. 'Within the domestic 
economy, fiat money brings about a number of serious consequences. 
Its only benefit is probably its ease of use. But what is the point of 
having something that is easy and convenient which, however, is 
highly detrimental to the people, the nation and the world? 

Instability of Fiat Money 

Because fiat money is created out of nothing, there is a tendency to 
overcreate it. In most countries, the monetary aggregates (i.e. money 

1 As we argued carli er, this is likely to bring about a gradual shift of power away from 

the governments to the financial institutions, unless the financial institutions are 

government owned. 


The Gold Dinar in Domestic Transactions 

supply) have increased at high rates relative to the growth in the real 
economies. In many cases, the growth rates in broad money (M2) are 
more than double the growth rates in the real GDPs — a recipe for 
inflationary pressures and economic problems. Appendix E provides 
the growth rates for these two variables between 1986 and 1996 for 
sixty-two developing nations. Take a look and decide which countries 
in your opinion are likely to get into economic and financial crises. 

Such overcreation of fiat money can jeopardize the credibility of 
the issuing nation. Many fiat monies have collapsed to their zero- 
mtrinsic value in the past. As the truth unfolds, all fiat currencies 
ultimately seem to return to their zero intrinsic value. Obsolescence of 
fiat money is nothing new. Many paper currencies and coins of the 
past have become obsolete and therefore valueless. 1 2 Gold, on the other 
hand, has maintained a fairly stable value throughout history. No gold 
com has ever become totally valueless. We could probably learn from 
the behaviour of our great-grandmothers who always had some gold 
ornaments as reliable and stable savings for the future. Due to political 
turmoil, wars, etc., many people in the past have been displaced to new 
lands. In such circumstances, it is assets like gold that one can safely 
rely upon for relocating or re-establishing oneself in a new country. 
National fiat currencies simply cannot be relied upon during such 
turbulent times. Fiat currencies have been known to devalue to very 
low levels. For example, when the Russian rouble collapsed in 1991 -92 
the savings of the people were pra ctically wiped out. 3 It is important to 

3 5f ept those that are collected for their numismatic value. 

credit nfth d VSl 3 fiat J C “ rrenC) ' are ve T much dependent on the 
credibility of the issuer. When credibility is lost, the currency could significantly lose 

Irad chnar eV th ^° me ° h ' S ° Icte ’ 35 ha PPened to many currencies of the past. The 
nni Vu aftermath of the American invasion is an example. Significant 

real ” ' ,kely * ^ ^ were in 


Chapter Seven 

note that currency transactions are zero-sum games. This means the 
loss to one is a gain to another. If that is the case, as in the Russian 
example, then who actually gained if the people lost their savings? It is 
clear, though, that the last person to hold a currency that has lost its 
value would lose all the purchasing power of the money at that point in 
time. The winners and losers in this fiat-money game are shown 
below in Diagram 10. In the fiat money system, basically, the issuer of 
the fiat money gets all the benefit of seigniorage upfront when it is 
introduced into the economy for the first time. Due to inflation, the 
subsequent holders bear the gradual loss of its value. The last person to 
hold it when the fiat money collapses loses most, if not all, of its value. 
This is like the “Old Maid” game — the person who holds the old maid 
card last loses the game! The same is also true in the case of 
international reserve currencies like the dollar. 

Diagram 10: The “Old Maid " Game 
Fiat Money: From Seigniorage to Zero Intrinsic Value 

Implementing the Gold Dinar in Domestic Transactions j 

It is always wise to institute changes in well-seasoned systems | 

gradually. Abrupt changes may “rock the boat” and thereby cause more j 


The Gold Dinar in Domestic Transactions 

harm than good, even if intentions are noble. As a strategy, therefore, it 
may be best to introduce the gold dinar in international trades first 
where the implications on national currencies are minimal. 
Introducing the gold dinar for domestic transactions needs to be done 
carefully since this has strong implications for the national currency, 
the banking and finance system, etc. 

A practical way to introduce the gold dinar for domestic use is 
probably through electronic means, i.e. an electronic payment system 
similar to the debit card system but which uses gold for money. This is 
illustrated in Diagram 11. 

Here individuals and firms may transact using electronic money 
but every transaction would involve gold “movement” between 
accounts with a custodian. Again, even though this seems like a gold 
backed instrument, it actually uses gold itself for payment. 4 The 
custodian role can be played by an Internet financial services provider 
(IFSP), a commercial bank or, even better, the Central Bank 5 itself. 

The Central Bank/Mint would probably be the best since this would 
boost confidence and ensure that the system is less susceptible to 
abuse. It is extremely important to make sure that the amount of gold 
dinar circulating matches the actual amount of gold deposited with the 
custodian(s). Otherwise, this would mimic the historical development 
of banking where the goldsmiths entrusted with gold for safekeeping 
printed more certificates of ownership than the amount of gold they 
actually had in their possession. 

4 This is not a system where one redeems a financial instrument for gold. 

Nonetheless, a transparent constant monitoring and real -time auditing may be 
necessary to ascertain that the total gold in circulation matches the actual amount of 
gold held within the system. 

Or the mint like the Royal Mint in the Malaysian case. The min t is suitable since 
generally it is a high security place that has vaults for the safekeeping of gold. 


Chapter Seven 

Diagram 1 1: Model for the Gold Dinar in Domestic Transactions 

Individuals, firms, businesses and institutions (circles and elipses) would 
deal with the commercial banks (squares) that support gold accounts. 

The gold holdings of these economic units would be held by a custodian, 
say, the Central Bank, the Mint (cubes) or an Internet financial services 
provider (IFSP). As the economic units transact among themselves, the 
ownership of gold changes and is kept track of, but nevertheless, a 
physical transfer of gold is not necessary. 

Advantages of the Gold Dinar in Domestic Transactions 

The use of the gold dinar in domestic transactions may be expected to 
bring about numerous advantages, among which are: 6 

6 Ahamed Kameel Mydin Meera, The Islamic Gold Dinar , Pelanduk 2002 may shed 
further light on why the following are benefits of the gold dinar system. 


The Gold Dinar in Domestic Transactions 

1. Socio-economic benefits. Since with gold there would be 
neither creation nor destruction of money, business cycle 
effects can be expected to be veiy much reduced. Along with 
this, problems like inflation and unemployment can be § 
minimized too. During a recession money gets destroyed and 
hat translates into business slowdowns, unemployment etc 

During S uch times it is the lack of money in circulation ihat'is 
ruly the cause of unemployment, etc. 

2. Unlike the effects of money creation in the present system, a 
more equitable distribution of income and wealth can be 
expected from the gold dinar. 

3. Since money creation is not possible with the gold dinar 
financial distress, bankruptcies and unfair confiscation of real 
wealth would be minimized too. 

4. Agriculture would be given its due importance. Money 
creation ,n the present fiat money system causes the prices of 

h/rZT,,^’- Pr ° dUCtS ’ P articu larly those of necessities, to 
be controlled. 1T„s, m turn, makes agriculture not an attractive 
sector compared to other sectors. 

5. With the gold dinar, better and more affordable housing can 
be expected. In the present fiat money system, the property 
sector is one of the sectors that absorbs money supply thus*^ 
making the price of homes increase substantially, thereby 

Ph ^. a u Urden ° n the low income 8 rou P’ The siz e of homes 
to len^he^ C ° meS SmalIer while dle mortgage duration tends 

6. The basic necessities of people can be expected to be fulfilled 
aster in a gold dinar system and, therefore, it would release a 

of time for the people. The current system tends to make 

™ th ™ Drk > some working day and night shifts — 
just to fulfil their basic needs. 

7- The gold dinar is ajust system that protects a nation’s 
sovereignty that could easily be lost if, for example, huge 
foreign banks are allowed to come in. With sovereignty 
protected, the wealth, religion, law, education and culture of 
people would be protected too. 

Chapter Seven 

8. With the gold dinar, counterfeiting would not be possible. In 
the present fiat money system, with modem printing 
technologies counterfeiting of money could be very easy. 

9. Transactions in the gold dinar are instantaneous with actual 
gold movement within a gold custodian accounts. Therefore, 
intennediate credit creation like that with credit cards does not 
take place. 

10. Gold is a global currency. It does not become obsolete like 
many currencies of the past. Also, currency transaction costs 
(i.e. the different buying and selling rates for currencies) 
would be eliminated. 

1 1 . The gold dinar would dichotomize Islamic and conventional 
banking effectively. In today’s dual banking system, any price 
difference between Islamic financing and the conventional 
would be easily arbitraged away, thereby bringing the two 
markets to converge, i.e. the law of one price. For this reason, 
when pricing Islamic financial instruments, the Islamic banks 
have to refer to the market interest rate — the very thing they 
were supposed to avoid in the first place. The gold dinar, 
nevertheless, puts a barrier for the law of one price to work 
and hence their convergence. 

12. Protection from money meltdowns. The current global 
financial scenario is such that a global financial collapse seems 
unavoidable and may occur at any time. Fiat money could lose 
its value drastically as happened even to the so-called 
superpowers, like the Russian rouble in 1991-92. 

Steps in Implementing Gold Dinar in Domestic Transactions 

As countries implement the gold dinar in international trade, the 
public may be prepared to gradually use gold in domestic transactions. 
Observing the current unstable global financial scenario, it may be wise 
for everyone to have some real assets as savings. Gold is likely to be a 
better choice here since historically it has held its value stable. Gold is a 
good store of value. 

The Gold Dinar in Domestic Transactions 

Accordingly, before ^ comes * used fof 

he pubhc can be encouraged to save in gold. Gold savings are ako 
hkely to give protection against any money meltdowns as that being 
pre icted by some experts on money. It may even be advisable for 
governments to implement national gold (and other precious metals 

! CT) SaVmg SChemeS for the P e °Plc- 7 Basically, these are unit 
trusts that invest rn gold and other precious metals like silver. Since 

go I is bullish in the present unstable global financial scenario, even a 
goo portion of national employee savings could be invested in gold, 
n Malaysia, a portion of the Employees Provident Fund (EPF) and 

liquid funds wtth the Lembaga Tabung Haji could be invested in gold. 
The people are unlikely to lose in this. 

Gradually, these savings in precious metals can be transformed into 
a payment system - usingboth minted coins and electronic money. 

e gold dinar for domestic transactions is, therefore, compatible with 
modern financial architecture with automated teller machines (ATMs) 
and Islamic debit cards, charge cards, credit cards, etc. Internet financial 
service providers (IFSP) could also operate within this system The 
electronic dinar or e-dinar, gold dinar cards, etc. could be easily 
implemented. With the card system, the financial architecture can also 
be made to replicate the gold dinar multilatetal trade and thereby 
make the whole system more efficient with a smaller amount of 
Physical gold (See Diagram 12). For example, let’s assume that the 
Physical gold of individuals is kept with the central bank/mint and the 
accountings are kept by the commercial banks. Individuals make 
payments using cards, but postings or settlements are done only once a 
month (just as in the present cred ,t card system when individuals are 

could Be , aunched 

Chapter Seven 

Diagram 12: Gold Dinar in Domestic Transactions 
using electronic medium, e.g. the e-dinar card 

Businesses and 
































































Total Rece 


Using electronic card system, the gold dinar in multilateral trade concept 
can be replicated for the domestic implementation of the gold dinar. 
Economic units, i.e. individuals, institutions, businesses and corporations, 
use the electronic payment system for their gold dinar transactions. Just 
like the present card system, these comprise only accounting entries, 
without involving any actual transfer of money. The economic units 
would be provided with their respective summary of transactions on a 
monthly basis, who are then required to settle only the net differences 
among themselves. In this way, significant transactions cancel among 
themselves and thereby require smaller amounts of physical gold for 
settlement compared with the volume of transactions. 

Mechanisms similar to current accounts, debit cards, charge cards 
etc. can be used, but the important thing is that all transactions must use 
gold as unit of account for pricing and all settlements must involve real 
physical gold units. 


The Gold Dinar in Domestic Transactions 

provided with their statements once a month). In this way, sigttificant 
ansactions are likely to contra themselves and thereby require 
smaller amounts of physical gold for settlement compared with the 
volume of transactions. However, minted coins should also be allowed 
to circulate m order to boost confidence in the system. 

In the meantime, individuals and businesses should be encouraged 
to accept and use the gold dinar for transactions. This establishes a 
parallel gold dinar economy that creates new wealth using the new 
money. Goods and services would be priced in the gold dinar too. 

Retail outlets like supermarkets should particularly be targeted to 
encourage the use of the gold dinar. In Malaysia, institutions like the 
Lembaga Tabung Haji could price hajj and ummh trips, etc. in gold 
dinars. The existence of a dinar economy would also facilitate zakat 
payments to be made in dinars. In fact, instituting^ in the gold 

dinar model is highly desirable since this would act as a demurrage 
charge and thereby encourage the circulation of the gold dinar. >° 

It should be highlighted here that the gold dinar is not a Muslim 
monopoly system. Even though the gold dinar is associated with the 
Muslims, it was actually “borrowed” from the Roman Byzantine 
Empire. The word diner is derived from the Latin word denarius. The 
oman gold coin and the Persian silver coin (called dirham ) were 
accepted by the Prophet Muhammad (peace be upon him) as the 

9 ^ rtlcular ly those made by corporations. 

4 SS5 T 'T,“" ? 


Chapter Seven 

monetary units for Muslims . 11 The Holy Prophet (peace be upon him) 


brought changes to many economic, social and business institutions 
but accepted the gold dinar as money. The gold dinar must, therefore, 
necessarily be something just and desirable. Hence, the acceptability of 
the gold dinar by non-Muslims should not be a problem at all. In fact, 
electronic gold payment systems are already functional in some parts of 
the world. Examples include e-gold, goldeconomy, goldmoney, e- 
dinar , 13 etc. Even some retail outlets like supermarkets have begun to 
accept gold as money . 14 This is certainly a good development. Just like 
the gold dinar in the international trade model, the gold dinar in 
domestic transactions can coexist with national currencies. Therefore, 
if the need arises, the gold dinar can be exchanged into national 
currencies based on the real-time gold price and vice versa. Since gold 
has an established international market, linking the gold dinar to other 
global gold payment systems like those mentioned above, should not 
be difficult. The e-dinar, e-gold, goldmoney, etc. can be easily linked 
for international transactions. 

Silver as Money 

We have discussed at length in favour of gold as money. However, 
historically for centuries it was gold and silver that together played the 
role of money. This is called bimetallism. In fact historically, man used 
silver as money long before he used gold for that purpose. Dirhams 
were the silver coins of the Islamic world. The existence of silver 

1 1 The words dinar and dirham are mentioned in the Holy Qur’an in the verses A1 - 
’Imran (3):75 and Yusuf (12):20 respectively. 

12 And hence the birth of Islamic transaction law or Fiqh Muamalat. 

13 The following are their respective weblinks:,, 

14 The current size is, nevertheless, small. 


The Gold Dinar in Domestic Transactions 

gether with gold as money is desirable since both can provide a stable 
umt of account to pnce each other. Moreover, silver can be used for 
t e smaller denominations of money. Accordingly, silver can reduce 
much of the burden on gold to play the role of money alone. In the 

history of Islam, the copper^ was also used for even smaller 


Nationalization of Commercial Banks 

In most countries, commercial banks are generally not totally 
government owned. In many cases they are privately owned. 15 This 
means the minority owners of banks would benefit immensely from 
t e interest that would be charged on money created by the banks. 

urrently, money created by the banking sector simply through the 
accounting process comprises huge proportions of national monies in 
many cases greater than 70 per cent. In other words, less than 30 per 
cent of money supply is state money, i.e. paper notes and coins (See 
ppendixE). Therefore, as mentioned elsewhere earlier, most money 
IS ebt money that demands interest on it. Hence even an interest rate 
as low as 5 per cent means that the banking sector would “gobble” up a 
significant amount of national output and wealth basically from 
nothing! We have mentioned numerous times the many problems 
caused by fiat money, fractional reserve banking and interest rates In 
plain language, this is basically robbing nations of their wealth and 

As a matter of Set, even some central banks are privately owned. 


Chapter Seven 

sovereignty. Therefore, it is crucial to address this problem of private 
banking as it is today. 

In the process of transition towards implementing the gold dinar 
in domestic transactions, it may be desirable to nationalize banks first. 
Unfortunately, the term ‘nationalization’ has negative connotations 
and thus strong opposition could be expected. 16 Nonetheless, some 
important advantages of nationalizing banks are: 

1 . Money creation and the allotment of purchasing power rest 
with the government alone. The assumption here is that 
governments are likely to look after the welfare of the people 
better than private bankers who are likely to look after their 
private interests first. 

2. Any additional money created by a nationalized bank is 
basically state money or public money. The new money may 
be introduced into the economy through the government’s 
fiscal expenditure. The seigniorage from the introduction of 
new money may be used for public benefits, e.g. building 
schools, universities, hospitals, roads and other infrastructures, 
better salary for the public servants, etc. Therefore, in the 
transition period, taxation and borrowing need not be the only 
means of public finance. 

Hence with total money supply in the hands of the 
government, it would be easier to move towards a 100 pei cent 
reserve requirement that is consistent with a real money 
system. A gold money system is incompatible with fractional 
reserve banking where the money supply can be more volatile 
than the quantity of gold reserves as changes in the reserve 
ratio take place. This would surely contribute to monetary 
instability. 17 

16 Particularly in the current era of globalization and neo -liberalization. 

17 See Tarek el-Diwany, “History of Banking: An Analysis”, in the Proceedings of the 
2002 Internationa I Conference on Stable and fust Global Monetary System , International 
Islamic University, p.15. 

1 1 A 

The Gold Dinar in Domestic Transactions 

3 ' ™ t h the8 11 dl T“ money ’ multiplede p°^ 

not be possible and, therefore, money may no longer enter 
into the economy as debt (as is the case in the current fiat 
money system) As discussed in Part One, the introduction of 

4 ^ dd v ^ Sen ° US re P ercussi °ns on the economy 

4. With national, zat, on of banks, the policy of a zero interest rate 
O even a negative interest rate can be easily administered, 
egaove interest rates or demurrage charges are important for 

fostiwted ^ 35 3 demurra B e can also be 

instituted. These are additional revenues for the government. 

A zero or neganve interest rate is also a prelude to the gold 
dinar economy. 5 

Under previous gold standards, the existence of interest 

aerate tha^T ‘T (md ^ t0 

stock" th f d n0t be SUpported b >' § rowth in the gold 

Nationalization of banks was also an option that was considered in 
solving the current Japanese banking crisis, which has been there for 
quite some time now. 

Orderly Implementation within a Timeframe 

An orderly implementation of the gold dinar, without creating any 
chaos, should cover a reasonable time span. A complete gold payment 
system (for international and domestic transactions) may take about 10 
to 15 years for implementation. Below is a time-line we foresee: 20 

I! 5f e Lietacr > The Future of Money, Century, p.248. 

Intpru r HlSt0ry ofBanla ng: An Analysis”, in the Proceedings of the 2002 

° Of course, subject to political wills and so on. 

Chapter Seven 

0-5 years . Af 

• Continuous public and government education on the need 

a new global monetary system and the feasibility of real 
monetary systems like the gold dinar, commodity monies, 
complementary currencies, etc. Establishing a gold dinar 
secretariat may help in achieving the above objectives — wit 
fliers, pamphlets, web-pages, etc. 

• Start the gold dinar in multilateral trade on a small scale 
among a small number of countries. Countries may trade with 
gold producing countries in order to increase their respective 

gold holding. . 

• Establish the nucleus for a parallel gold dinar economy, i.e. the 
implementation of the gold payment system in domestic 
transactions. Encourage gold savings (EPF, Tabung Haji, 
Amanah Saham Dinar Emas, etc.), mint physical gold dinars, 
identify businesses that would accept the gold dinar (Retail 
outlets for consumer goods, Tabung Haji, Zakat Collection 
Centres, etc.), create a small circle of gold dinar electronic 
payment system (e-dinar and gold dinar cards). 

J Enlarge further the gold payment system by transferring gold 
savings into the system. 

• Nationalize banks and government takes total conti ol o 
money creation. Gradually convert all monetary aggregates 

into MO. . n 

• Further accumulate gold stock and use it to back the MO. 

• Expand further the gold dinar in multilateral trade by bringing 

in more countries. 

Chapter 8 


An invasion of armies can be resisted, but not an idea whose time has come. 
— Victor Hugo, ‘Histoire d’un Crime’, 1852 

THIS BOOK BASICALLY highlighted the instability and unjustness 
embed ded in the present global fi at monetary system and suggested a 
solution or a way out for nations that desire one. It reasoned with the 
reader that there are huge stakes in the current monetary system — i.e. 
national wealth and sovereignty — as faced by all nations particularly 
the developing ones. 

The book also highlighted the fact that the current fiat money is 
created out of nothing and is mostly introduced into the economy in the 
form of debt, providing a tremendous advantage to those who create it. 1 
Moreover, interest charges on fiat money make the entire system not 
only unjust but unsustainable too. The easy creation of fiat money has 
brought about too much liquidity globally while interest charges force 
the additional creation of money that demands a constant growth in the 

If lending money, for a time period, with a fixed return is considered riba (usurious), 
then the creation of fiat money must constitute a greater riba since it is created at a 
point in time, out of nothing, but ‘enthroned’ with purchasing power. 


Chapter Eight 

real economy, just to maintain living standards. This is the reason why in 

almost all countries, including the developed nations, money and debt 

grow together. Growth in debt, in turn, has implications for financial 

management that makes the whole system unsustainable. All this has 

currently brought the global financial system to the verge of collapse that 

has serious repercussions for the real economy. Major world economies, 

i.e. the United States, Europe and Japan, are in financial and economic 

distress simultaneously, as never before. 

The book also reasoned with the reader about how developing 

nations tend to lose substantially in the present global fiat money 

system, that some kind of “thfeft of nations” is taking place. At the 

international level, nations lose enormously when they use alien fiat 

currencies as international reserve currencies. They are also likely to 

become victims of currency rigging, manipulation, speculation, etc. 

Some have already been enslaved through the international debt 

system and are subjected to unfair agreements and regulations. In their 

zeal to protect their strategic position, the international financial 

institutions like the IMF, the World Bank and the like may attempt to 

establish themselves as the global central bank (GCB). 2 Just as the < ; 

Bank for International Settlements (BIS) was created in the wake of 

the 1931-32 German debt crisis and the IMF and World Bank were | 

created after World War II, it is not surprising that a GCB is being ; ■ j 

promoted in the current global financial chaos. 3 || 

Nonetheless, the book argues that countries need not feel hopeless, j 

It suggests a promising solution, i.e. returning to the use of real monies, w 


focusing on gold. Any real money for that matter — like other precious jjl 

2 A GCB would effectively become the Supreme World Ruler. 

3 Please see Robert L. Bartley, “World Money at the Palazzo Mundell — Does the 
global economy need a global currency?”, Wall Street Journal June 30, 2003. 





metak and complementary currencies like .he LETS schemes etc - 

" f e' y t0 PrOVide “«“*»• Nations may gradually implement a 

gold payment system, starting with international trade _ i e for settling 
. ateral and mulnlateral trade arrangements. The book highlighted the 
enefits of mulnlateral payment arrangements where the amount of 
gold needed for settling trade balances can be minimized Such 
arrangements not only bring about stability by el, urinating fore™ 

on, but also enable countries without international reserve 
currencies to trade globally. For the interested reader, Appendix F 

compares gold wrth currency forwards, futures and options as a tool for 
hedging foreign exchange risk. 

Finally, some steps for the implementation of the gold payment 
system m demesne transactions are also discussed. The use of real 
momes for mtemational and domestic transactions is likely to bring 
about numerous des, table effects on the economy particularly in th e 
form of stability and protection from international financial 

predators . Real monies promise a stable, balanced, harmonious and 
just economic growth for nations to relish. 

° Ur T 0nal PrediCti ° n fOT 1116 fttUre iS that a 8 lobal central bank 

and yen'— ' i tT CUrreiKy ~ ° f the d °<^ euro 

y ,S likely to come true. The IMF, the World Bank, the Bank 

0 ntemational Settlement and sim.lar institutions are probable 

candidates for the GCB. Since central banks of countries are 

ip omatically linked to these international financial institutions, the 

mer are also likely to go along with the latter and succumb to the 

idea of a single world currency and a world central bank. If this 

Chapter Eight 

happens, the GCB would marginalize the local central banks and 
reduce their role to mere enforcers of the GCB’s policies. 4 

The Islamic banking system as today, enjoys the seigniorage of 
creating money out of thin air, just like the conventional bank, but 
lends it out using Islamic principles. 5 The Islamic Development Bank 
(IDB) on the contrary, works similar to the IMF. The IMF lends out 
to countries Special Drawing Rights (SDR) 6 which are basically 
overdraft facilities (which are again money created out of nothing). 
The IMF brought forth the SDR as a substitute for gold. The former 
competes with the latter as a reserve asset. Nonetheless, the Islamic 
Development Bank’s “SDR” is ironically called the “Islamic Dinar”! A 
monetary system based on gold would not allow such easy money 
creation. With such a background, can we expect the banks, i.e. the 
commercial banks, central banks, Islamic banks, the IMF and the IDB, 
to support the gold dinar concept? The chances are small, but we are 
hopeful, for the sake of future global financial and economic stability, 
justice and peace. 

My greater hope lies, nevertheless, with the private sector. Private 
sector units of account based on gold are already functional on the 
internet — e-gold, goldmoney, e-dinar are some examples. While the 
size is still small, it will grow as people begin to understand the 
benefits. Other parties that could be expected to support the gold 

So much for the argument that the fiat monetaiy system allows policy independence 
and flexibility. 

In fact, the Islamic banking system in Malaysia has been known to lobby for the 
minimizing or even the abolition the statutory reserve requirement, which can 
effecdvely enable the bank to create an unlimited amount of money, irrespective and 
unrelated to the amount of deposits it has (only to be checked by other con ditions 
like the capital adequacy ratio). While this may seem good for the Islamic banks, it is 
a likely disaster for the economy. 

One SDR was initially equivalent to one US dollar, but now redefined as a basket of 
currencies consisting of the dollar, e uro, yen and pound sterling. 


wisdom behind it UnderStand the 

subjects enslaved by foreign forces , , *> « their 

of Malaysia, Dr Mahathir Mohamad should lT ^ ^ 

mooting the gold dinar concept and nr vr COmmended f°r 

diso io be commended is the Royal * 

significance ofwhich only time win teil J 7 8 ’ 20 °3-the 

g Through the pretext of globalization r 
A picture ofwhich adonE fte co r;^cf 

Appendix A 

The Equation of Exchange 1 

THE EQUATION OF exchange is usually expressed as below: 

M x V = p x Y 

Where M is the money supply; V is the velocity or the number of 
times per year the average dollar is spent on goods and services; P is the 
aggregate or average price level; and Y is the real output of goods and 
services produced in the economy . 2 

The money supply M consists of currency in circulation plus 
demand deposits in banks. In monetary aggregates this is usually 
referred to as Ml. We take this definition for money here since 
payments for most transactions are done with either of these two. The 
velocity is the number of times the average dollar is spent on goods and 

MAM ' aefi '™ tt l e , read secdon „ is reproduced from Ahamed Kameel 
y^ in Meera, The Islamic Cold Dinar, Pelanduk, 2002 

+ 1 + G + X ” *e Keynesian framework, 

on tZ d mMacroeconomks textbooks. MV is the total amountspem 

on final goods and services in one year, thus is equal to nominal GDP. Nominal 

2“'” tUm ' equals PYwhich is the Priee level times physical output of goods and 


The Theft of Nations — Returning to Gold 

services within a year. Assume that Mr A used a RM50 note to buy a 
book, and then the bookseller used the note to buy a pair of shoes. The 
same RM50 note changed hands twice, being used to pay for two items 
in the economy within the year. Therefore, its velocity is two. The P is 
the aggregate price level, which is like the average price of all things in 
the economy. It is not measured by the consumer price index (CPI), 
which tracks the price of only a basket of selected goods. The Y is the 
real output of goods and services produced in the year — the actual 

quantity of tables, cars, etc. ■ 

The above equation therefore simply equates the flow of money to 
the opposite flow of goods and services. M times V is the total amount 
of money in the economy while P times Y, i.e. price times quantity is 
the total dollar value of the output of goods and services in the 
economy. Therefore, the equation of exchange is actually an identity 

something that is true by logic. The equation suggests, for example, 

that if we increase the quantity of money without a corresponding 
increase in goods and services, only price levels will go up, i.e. 
inflationary (assuming velocity is constant). An example would be 
during the Japanese occupation of Malaya, when the Japanese 
introduced an abundance of paper money sometimes called by the 
locals ‘banana leaf money’. 3 This sudden increase in money supply 
only brought about inflation. This suggests that a nation cannot be 
made wealthy by simply printing money and putting it into the hands 

of its people. 

The velocity of money supply is generally constant in the short 
run. 4 It may change, for example, if there is a change in the mode of 

3 The money had a picture of a banana tree featured on it. 

4 This is a monetarist view. The Keynesians may argue that the V is not stable. It V is 
in fact stable, then a direct, predictable relationship must exist between the money 



payments as when credit cards are introduced into the system for the 
first time. After a change, it would remain fairly constant until some 
other shocks come about. As suggested by the equation of exchange, if 
for any reason the velocity increases abruptly, the effect would be 
inflationary too. An example would be during the fall of the Soviet 
Union, people lost confidence in the Russian rouble and thus tried to 
get rid of it by spending it away. This increased the velocity 
significantly and hence brought about hyperinflation. If we take 
velocity as constant, this transforms die equation of exchange into the 
quantity theory of money that states that the nominal income (P x Y) is 
solely determined by the quantity of money, i.e. 

•— ► 

M directly affects PY 

Therefore, a direct relationship between money supply and 
nominal GDP would be observed if velocity is constant. 

supply and nominal GDP. In fact, this is the case for Malaysia. The correlation 
coefficient between Money Supply, Ml and nominal GDP is almost unity, 
suggesting a stable and predictable re lationship. 


Appendix B 

Riba in the Holy Scriptures 

Riba in the Qur'an 

Al-Baqarah (2) 

275. Those who devour usury will not stand except as stands one 
whom the Evil one by his touch hath driven to madness. That is 
because they say: “Trade is like usury,” but Allah hath permitted, 
trade and forbidden usury. Those who after receiving direction 
from their Lord, desist, shall be pardoned for the past; their case is 
for Allah (to judge); but those who repeat (the offence) are 
companions of the Fire; They will abide therein (for ever). 

276. Allah will deprive usury of all blessing, but will give increase or 
deeds of charity: For He loveth not creatures ungrateful and 


277 Those who believe, and do deeds of righteousness, and estabns 
‘ regular prayers and regular charity, will have their reward with 
their Lord: on them shall be no fear, nor shall they grieve. 

278. O ye who believe! Fear Allah, and give up what remains of your 
demand for usury, if ye are indeed believers. 

279. If ye do it not, take notice of war from Allah and His Messenger. 
But if ye repent, ye shall have your capital sums. Deal not 
unjustly, and ye shall not be dealt with unjustly. 

Appendix B 

Ali Imran (3) 

128. Not for thee, (but for Allah), is the decision: Whether He turn in 

190 tTh l°u h i em ’ TT? them ’ f ° r they are indeed won g-doers. 

129. To Allah belongeth all that is in the heavens and on earth. He 

forgiveth whom He pleaseth and punisheth whom He pleaseth- 
but Allah is Oft-Forgiving, Most Merciful. 

130. O ye who believe! Devour not usury, doubled and multiplied; but 
fear Allah; that ye may (really) prosper. 

131. Fear the Fire, which is prepared for those who reject Faith: 

132. And obey Allah and the Messenger; that ye may obtain mercy. 

An-Nisa (4) 

158. Nay, Allah raised him up unto Himself; and Allah is Exalted in 
Power, Wise; 

159. And there is none of the People of the Book but must believe in 
him before his death; and on the Day of Judgment he will be a 
witness against them; 

160. For the iniquity of the Jews We made unlawful for them certain 

(foods) good and wholesome which had been lawful for them* 

in that they hindered many from Allah’s Way; 

| 161. That they took usury, though they were forbidden; and that they 

; | devoured men’s substance wrongfully; — we have prepared for 

j, those among them who reject faith a grievous punishment. 

j Ar-Rum (30) 

[ 39 ‘ That whlch Y e la Y out for increase through the property of (other) 

people, will have no increase with Allah: but that which ye lay out 
for chanty, seeking the Countenance of Allah, (will increase): it is 
! * these who will get a recompense multiplied. 

j E 40. It is Allah Who has created you: fhrther, He has provided for your 
| ; sustenance; then He will to die; and again He will give 
you life. Are there any of your (false) “Partners” who can do any 

single one of these things? Glory to Him! and high is He above the 
\ partners they attribute (to him) ! 

U 41. Mischief has appeared on land and sea because of (the meed) that 
; the hands of men have earned, that (Allah) may give them a taste 


The Theft of Nations — Returning to Gold 

of some of their deeds: in order that they may turn back (from 
evil). ^ 

Riba in the Bible 

(Quoted from the New International Version) 

EX ° (God saysl “If you lend money to one of my people amongyou 
who is needy, do not be like a moneylender; charge him no 


Leviticus 25:35-37 , . 

[God saidl 35 “If one of your countrymen becomes poor an 

unable to support himself among you, help him as you would an 
alien or a temporary resident, so he can continue to ive among 
you. 36 Do not take interest of any kind from him, but fear your 
God, so that your countryman may continue to ^an^ngyou. 
37 You must not lend him money at interest or sell him food at 


Psalm 15 

TORD, who may dwell in your sanctuary ? 1 
Who may live on your holy hill? 

2 He whose walk is blameless 
and who does what is righteous, 
who speaks the truth from his heart 
3 and has no slander on his tongue, 
who does his neighbour no wrong 
and casts no slur on his fellowman, 

4 who despises a vile man 
but honours those who fear the LORD, 
who keeps his oath 
even when it hurts, 

5 who lends his money without usury 
and does not accept a bribe against the innocent. 

He who does these things 
will never be shaken. 


Appendix B 

Ezekiel 18:5-9 

[God says ] 5 “Suppose there is a righteous man who does what is 
just and right. 6 He does not eat at the mountain shrines or look to 
the idols of the house.of Israel. He does not defile his neighbour’s 
wife or lie with a woman during her period. 7 He does not oppress 
anyone, but returns what he took in pledge for a loan. He does not 
commit robbery but gives his food to the hungry and provides 
clothing for the naked . 8 He does not lend at usury or take 
excessive interest. He withholds his hand from doing wrong and 
judges fairly between man and man . 9 He follows my decrees and 
faithfully keeps my laws. That man is righteous; he will surely live, 
declares the Sovereign LORD.” 

Luke 6:32-36 

32 “Ifyou love those who love you, what credit is that to you? Even 
‘sinners’ love those who love them. 33 And if you do good to those 
who are good to you, what credit is that to you? Even ‘sinners’ do 
that. And if you lend to those from whom you expect repayment, 
what credit is that to you? Even ‘sinners’ lend to ‘sinners,’ 
expecting to be repaid in full. 35 But love your enemies, do good to 
them, and lend to them without expecting to get anything back. 
Then your reward will be great, and you will be sons of the Most 
High, because he is kind to the ungrateful and wicked. 36 Be 
merciful, just as your Father is merciful. 

Riba in the Torah 

(Quoted from the New International Version) 

Exodus 22:25 

[God says] If you lend money to one of my people amongyou 
who is needy, do not be like a moneylender; charge him no 



Appendix C 

The Money Creation Process 

Illustrated 1 

LET US ASSUME that the central bank places a statutory reserve 
requirement (SRR) ratio of 10 per cent; and that the SRR is the only 
policy variable used for affecting the money creation process. The 
reserve requirement is the proportion of deposits which the banking 
sector must keep as reserves to fulfil withdrawal needs. An original 
deposit of RM1,000 will enable the banking sector to increase deposits 
to a maximum amount of RM10,000 (i.e. RMl.000 divided by the 
reserve requirement of 0.10) through loan creation (i.e. money 
creation). Let us illustrate how this is done. Say that Mr X found 
RM1000, which he decided to deposit into a bank account. For 
simplicity, let us assume there is only one bank in the economy 
(alternatively you may think of all banks being consolidated or merged 
into a single entity). A T-account balance sheet entry of the bank 
would appear as below: 

> This section is also reproduced from Ahamed Kameel Mydin Meera, V re Iskmic 

Gold Dinar, Pelanduk, 2002. , c 

2 Other variables include the capital adequacy ratio, which we ignore here tor 



Appendix C 

Balance Sheet 

The cash account (reserve) is debited while MrX’s deposit 

account is credited with RM 1,000. The cash reserve now is 100 per 

cent of the deposit. However, since the bank is required to keep only 

10 per cent as reserves, the bank creates additional deposits until the 

reserve is 1 0 per cent of total deposits. How can additional deposits be 

created? By means of giving loans! The balance sheet position after 

money creation (assuming maximum money creation) 3 would be as 



Balance Sheet 



Deposits (loans) 



Notice that for the original RMl.000 deposit, an additional 
RM9,000 deposit is created by means of loans. 4 After money creation, 
the original RMl.000 deposit is now equivalent to 10 per cent of the ' 
current total deposits of RM10.000, i.e. the required reserve ratio. This 
increase in money through multiple deposit creation is a one-time 

Prindofe rhff T T U] ° p] " rS may never tlK ntaximum amount, in 
P, ” P ' ,he fa «io n al reserve system allows ‘money to be created’. 

mend W Htc Crra “ m0n ' y ° Ut ° f * in M ° ney is ^ banks 

computerrecmiR in Ae form^'f binary^it memoryspace!^ Cntr3eS * n ^ k 00 ^ 5 or 


The Theft of Nations — Returning to Gold 

increase in the ‘money base’. The formula for multiple deposit creation 
may be written as follows: 

D = -xR 

Where D = change in total checkable deposits 

r = required reserve ratio (e.g. 0.10 as in our example) 

R = change in reserves (e.g. the new deposit of RM1,000 

as in our example) 

Interest Rates and the Growth in Money Supply 

In addition to the above, the interest rates given and charged by banks 
also increase money supply in the long run. 5 In the conventional 
economic thinking, interest rate is said to be the price of money capital, 
following the normal demand-supply theory. However, we should 
notice that interest rates themselves, ceteris paribus, would increase the 
money supply. This fact is very important. Therefore, we expound on 

this matter further. 

Continuing with the earlier example, let us assume that interest 
rates are as follows - 5 per cent for the deposit rate and 10 per cent for 
the lending rate. We shall also assume that borrowed money does not 
earn interest. Now, in the next period the RM1.000 deposit money 
would earn RM50 interest and thus becomes RMl.050. The depositor 
would now be able to buy things in the economy for RMl.050. On the 
other hand, the loan balances would become RM9.900 (RM9,000 + 
0.10 x RM9.000). The extra RM900 is simply the interest income to the 

s See Tarek El-DKvany, Tite Problem With Interest, TA-HA Publishers, United 
Kingdom, 1997. 

Appendix C 

bank After paying depositors the interest of RM50, the bank makes a 
spread of RM850, which is 85 per cent of the original deposit. It is with 
this spread, the bank would pay the salaries of its employees, utility 
bills, etc., the remainder of which would comprise the bank’s retained 
earnings. The current balance sheet position is as shown below: 

Balance Sheet 









Notice that the current reserve of 1,000 is now inadequate for a 
total deposit of RM10,050. This suggests that, in the long run, the 
central bank would be forced to continually increase fiat money and/or 
the banks would continuously extend loans so that the reserve 
requirement can be met and thereby sustain the system. 6 The 
implication of this is that the existence of interest rates would 
themselves, ceteris paribus, force a continuous increase in both state 
money (fiat money) and bank money (loans). 

Hence with the simple existence of interest rates alone, under 
normal circumstances, money supply in an economy will grow by 
default. However, it is possible for this money supply to shrink back if 
a depositor withdraws cash from the banking system (and keeps it 
from re-entering the financial system), or when a loan is repaid, or 
when a borrower defaults on loan repayment (which at serious levels 
may cause banking crises, as was the case with non -performing loans 
or NPLs during the 1997 Malaysian financial crisis). 

In most countries the domestic debt levels have continuously grown. 


The Theft of Nations — Returning to Gold 

In summary, a fiat money interest based financial system 
continuously creates money in the economic system, and by the 
reverse process, the money so created can also be destroyed in the 
event deposits are withdrawn, loans repaid or borrowers default on 
loan repayments. 

Credit Cards and Growth in Money Supply 

The credit card system also increases the money supply. This is 
because every credit card transaction is a credit transaction. The 
implication of this is easy to see using a T -account. Assuming Mr A 
purchases something from Mr B for RM1,000 using his credit card. 
The Bank that issued the credit card will record the transaction as 
follows: Mr A’s account is debited as a loan to reflect a credit 
transaction while Mr B’s account is credited. This simple accounting 
entry is, however, inteipreted as follows: The Bank had paid Mr B on 
behalf of Mr A. Therefore, Mr A owes the Bank RMl,000! 

Mr A 

Loan 1,000 


Mr B 

Deposit 1,000 

Now since Mr B’s account is considered as a deposit, the Bank 
could also create money as discussed earlier through the fractional 
reserve requirement system. The bank can create multiple deposits by 
means of loans from this accounting “deposit”. If the reserve ratio is 10 


Appendix C 

™ additional R^ 000 deposits can be created through 

Apart from this, the bank also has an additional way to create 
money. Let us assume that Mr A fails to pay the Bank when he 
recedes his statement. Then the Bank will i mpose two charges on Mr 
A: W .merest on the $1,000 for not settling it! and (ii) a late payment 
ee. Note that Mr A has to pay these charges even though the bank did 
not pay anything to Mr B in the first place. It’s all in accounting! 

While it is possible to reduce (or control) money supply i n the 
run, for example, by increasing the reserve requirement ratio or 
ough open market operations (i.e. the selling of government bonds 
or y increasing bank discount rates), we postulate that the net Ion<r- 
run effect will still be an increase in money supply. This is simply due 
to the existence of interest rates in tire economy (note that government 
onds too pay interest even though the money obtained through the 
sale of such bonds may be simply kept in the vaults). 

Therefore, in an interest-based fiat monetary system, money 

supp y simply grows in the long run, even though in the short run it 
may be altered through monetary policies. 

Appendix D 

Currency Speculation 
and Arbitrage 1 

CURRENCY SPECULATORS AND arbitrageurs made huge profits during 
the 1997 East Asian Crisis. They took advantage of the flaws inherent 
in the global fiat monetary system. These speculators, that include 
international financial institutions and fund managers, are very 
knowledgeable about financial markets, economic cycles, etc. They use 
this knowledge to “attack” currencies, etc. to reap huge profits. The 
huge economic bubble that hovered over the East Asian countries, 
created by the fiat money credit bubble, 2 lured these speculators to 
attack the currencies of these countries by shorting them. Their action 
popped the bubble that brought about the 1997 East Asian crisis. 

Collective action of speculators would amount to an attack on the 
currency. While the central bank may counter such attacks to keep 
exchange rates within reasonable levels, a continuous attack can be 
difficult for the central bank to match. While speculators can take on 
huge leveraged positions, the central bank would need large amounts 
of foreign reserves to counter this. Inability to match the speculators 

1 This section is also reproduce d for the benefit of the reader from Ahamed Kameei 
Mydin Meera, The Islamic Gold Dinar, Pelanduk, 2002. 

2 But erroneously termed the ‘Asian Miracle’. 


Appendix D 

would cause the exchange rate to plunge as happened to the Asian 

currencies. The ringgit depreciated from an exchange rate of about 

RM2.47 to the dollar before the crisis to a rate of RM4.80 at some point 
in time during the crisis. 

While one may argue that it is ethically not right for speculators to 

attack a currency, it is the current global monetary system that allowed 
them to do so. 

When an exchange rate moves due to speculative attacks or 
otherwise, it breaks the equilibrium among currencies. This makes it 
possible for further profiteering called arbitrage profits. Arbitrage is like 

finding money on the ground. An example of currency speculation 
and arbitrage is given below. 

Currency Speculation and Arbitrage: An Example 

Consider the ringgit when it was attacked in August 1997. The 
shorting of the currency by speculators pushed the ringgit downward. 

Let us assume an initial exchange rate between three currencies, say, 
the ringgit, dollar and Singapore dollar as below: 



The Theft of Nations — Returning to Gold 

The ringgit exchange rate is RM2.40 and RM1.50 to one dollar and 
Singapore dollar respectively. The Singapore dollar rate is S$1.60 to the 

Such exchange rates are in equilibrium since no one can make 
profit by just trading between the three currencies. If one were to start 
with a dollar, exchange it into Singapore dollar, then change the 
Singapore dollar into ringgit and then back into US dollar, one would 
end up with a dollar again. 3 

Now assume that the shorting of the ringgit by the speculators 
pushes the exchange rate to RM3.80 per US dollar as shown below: 



By attacking the currency as such, the traders make two types of 
profits: (i) speculative and (ii) arbitrage profits. 

Speculative Profit: Speculative profit comes from the speculating that a 
currency would appreciate or depreciate (either due to economic factors 
or the speculative attacks themselves or even both). If the speculation is 

3 In this example we have ignored transaction costs. In practice, the buying and the 
selling rates for currencies would differ; the difference being the profit to the bank or 
money changer. Ignoring transaction costs, however, does not affect the illustration 
of this example. 


Appendix D 

correct, then the traders would make profits, however, if their 
speculation turns out to be wrong, they would then make losses. In our 
example, profit is made as follows. First, the trader sells short RM2.4 
million ringgit at the initial exchange rate of 2.40 per dollar. This equals 
US$1 million and would be credited to his account. Assume now that 
the attack caused the ringgit to depreciate to RM3.80 per dollar. Now at 
this new exchange rate the RM2.4 million is worth only US$0.63 
million.-' Therefore, the trader closes his position by buying back the 
RM2.4 million at this new rate and makes a handsome profit of 
US$0.37 million (i.e. US$370,0001). Even though the trader makes a 
hefty speculative profit of about US$370,000, the profit does not end 
there. There is another profit to be made _ the arbitrage profit. 

Arbitrage Profit: Arbitrage profit is made from the mispricing or 
disequilibrium among the exchange rates. In our example, this 
disequilibrium happened when the ringgit exchange rate moved. 
Arbitrage profits are realized at a point in time unlike speculative 

profits that require a span of time. In the above example the arbitrage 
profit is made as below: 

Step 1. Borrow US$1 million 5 and exchange it into RM3.8 million fat 

- o T r pr r hng exchan § e RM3.80 per US dollar) 
Step 2. Exchange the RM3.8 million into SS2.533 million (at the ' 

exchange rate ofRMl.50 per Singapore dollar) 

ep 3: Exchange the S$2.533 million into US$1.5833 million (at the 
exchange rate of S$1.60 per US dollar) 

* ITT' thC T Clllat0rs and arbitrageurs would not wait till the exchange ra te 
moves this much in order to profit. Profits are realized when the eSZa” 

, moves enough to cover transaction costs. ue excnange rate 

1S T' e “ a po,nt in dme ’ one may borrow this US$1 million 

SmDle,ed° r JUSt “ f'T T"”' wWli " whkh the “* ir£ «»nsaction could be 
mpleted, particularly if transactions are done on -line using computera. 

The Theft of Nations — Returning to Gold 

Step 4: Return back the loan of US$1 million, and keep the remaining 
US$583,333 as arbitrage profit. 6 

Hence the total speculative and arbitrage profits equal 370,000 + 
583,333 = US$953,333. Note that for a transaction of US$1 million 
each in the speculative and arbitrage activities, the profit is almost a 
whopping US$1 million too! Currency traders, however, do not just 
trade in millions but rather in billions! Hence imagine the amount of 
profits they would be making! ! 

As arbitrageurs make profit through their actions, the exchange 
rates between currencies would move until the arbitrage opportunity is 
eliminated. In our example since a profit is made by first exchanging 
US$ into ringgit, there would be a tendency for the ringgit to 
appreciate over the US dollar (or to “fight back” the attack). Similarly, 
the action of exchanging ringgit into Singapore dollar would make the 
Singapore dollar appreciate over the ringgit. The last transaction of 
changing the Singapore dollar back into the US dollar would cause the 
US dollar to appreciate over the Singapore dollar. Therefore, even 
though the speculators attacked only the ringgit, the Singapore dollar 
would appreciate over the ringgit and the US dollar would appreciate 
over the Singapore dollar until the arbitrage opportunity is eliminated. 
A final exchange rate as below would have eliminated such an arbitrage 
opportunity and would now form the new equilibrium exchange rate 
between the three currencies: 


6 Note that, in the example, the arbitrage transactions must be done clockwise starting 
from any of the currencies. This example starts from US$. If we had started using 
RMlmiliion, the profit would have been RM583,333 instead. Transactions done 
anti-clockwise would result in losses. Therefore, upfront one needs to determine the 
direction for making arbitrage profits — clockwise or anti -clockwise. 


Appendix D 

c . ° me us dollar and 

the Singapore dollar. Therefore, movements of all cross -currency rates 

could be expected. Nonetheless, only three currencies are needed for 
making an arbitrage profit. It takes only three currencies to break 
equilibrium and make arbitrage possible. For this reason such an 
ar itrage is also called a triangular arbitrage. 7 

Speculative and arb.trage profits using national currencies are 

ma e possible by the mere existence of numerous fiat cuirencies that 

are vo at, e m nature. The global fiat monetary system provides a fertile 

ground for speculation, manipulation and arbitrage in the foreign 
exchange market. 8 5 

either redundant or they reduce the nZ S m f transactions «*!* three are 

around $10-$20 b illb d B y 90ro al th° 1Ume 0fforeign exchan 8 e transactions was 
Bernard Ii«. ^ See 

Appendix E 

Country Monetary Aggregate Proportions and Growth Rates 
for the Period 1986-1996 


State Money (M0) 
as a Proportion of 
Broad Money (M2] 
in 1996 

Average Annual Growth Rate 1986 -1996 
. Narrow Broad 

) Money Money 

(Ml) (M2) 

1 Argentina 





2 Bahrain 





3 Bangladesh 





4 Belize 





5 Bolivia 





6 Botswana 





7 Brazil 





8 Burkina Faso 





9 Burundi 





10 Cameroon 





11 Chile 




24.68 .. 

12 China, P.R.: Mainland 





13 Costa Rica 





14 Ecuador 





15 Egypt 





16 El Salvador 





17 Ethiopia 





18 Fiji 





19 Ghana 





20 Guatemala 





21 Honduras 





22 India 





23 Indonesia 





24 Iran, I.R. of 





25 Jamaica 





26 Jordan 





27 Kenya 





28 Kuwait 





29 Lesotho 





30 Madagascar 







31 Malawi 

32 Malaysia 

33 Maldives 

34 Malta 

35 Mauritius 

36 Mexico 

37 Mozambique 

38 Myanmar 

39 Nepal 

40 Niger 

41 Nigeria 

42 Oman 

43 Pakistan 

44 Paraguay 

45 Peru 

" rc,, ® : '“ nu>l urowh w8 «->»6 
Broad Money (M2) Real GDP Harrow Money Broad Monev 

i n 1996 








46 Philippines 



47 Poland 



48 Rwanda 

' 0.49 

-2.39 ■ 

49 Saudi Arabia 



50 Sierra Leone 



51 South Africa 



52 Sri Lanka 



53 Syrian Arab Republic 



54 Tliailand 



55 Trinidad and Tobago 



56 Tunisia 



5/ Turkey 



58 Uganda 



59 Uruguay 



60 Venezuela, Rep. Bol. 



61 Zambia 



62 Zimbabwe 


















































Source: Computed using da, a from IMF Financial Statistics Yearbook 2000. Theorem!, 
rates are geometer, neam for, he decade 1986-1996, aooidingthe 1997 East Asian 

economic crisis period. 


Appendix F 

Hedging Foreign Exchange Risk 
with Forwards, Futures, Options 

and the Gold Dinar: 
A Comparison Note 

THE 1997 EAST Asian economic crisis made apparent how vulnerable 
currencies can be. The speculative attacks on the ringgit for example, 
almost devastated the economy if not for the quick and bold counter 
actions taken by the Malaysian government, particularly in checking 
the offshore ringgit transactions. It also made apparent the need for 
firms to manage foreign exchange risk. Many individuals, firms and 
businesses found themselves helpless in the wake of drastic exchange 
rate movements. Malaysia being among the most open countries in the 
world, in terms of international trade, was exposed to significant 
foreign exchange risk. 1 Foreign exchange risk refers to the uncertainties 
faced due to fluctuating exchange rates. For example, a Malaysian 
trader who exports palm oil to India for future payments to be received 
in rupees, faces the risk of rupees depreciating against the ringgit at the 
time the payment is made. This is because if the rupee depreciates, a 
smaller amount of ringgit will be received when the rupees are 

The Economist magazine’s Pocket World in Figures (2002 edition) ranks Malaysia the 
second most trade dependent country in the world. Trade as a per centage of GDP is 
92 per cent for Malaysia, even higher than that of Singapore which ranks third with a 
percentage of 78.8 per cent. See p.32. 

1 AA 

Appendix F 

exchanged into ringgit Therefore, what originally seemed a profitable 
venture could turn out to be a loss due to exchange rate fluctuations 
uch nsks are common m international trade and finance. A siprificant 
number of international investments, trades and dealings are shelved 
due to the unwillingness of parties concerned to bear foreign exchange 
ns ence it is important for businesses to manage this foreign 
exchange risk so that they may concentrate on what they are good at 
and eliminate or minimize a risk that is not their trade. Unfortunately 
however, m the case of most developing nations including Malaysia, ’ 
tools available for managing foreign exchange risk are minimal. 
Traditionally, the forward rates, currency futures and options have 
been used for this purpose. The futures and options markets are also 
known as derivative markets. However, in many nations, including 
Malaysia, futures and options on currencies are not available. The 
Malaysian Derivatives Exchange (MDEX), for example, makes 
available a number of derivative instruments — Kuala Lumpur 
Composite Index Futures, Index Options, Crude Palm Oil Futures 
and KLIBOR (interest rate) Futures _ but not ringgit futures or 
options. Even in countries where currency derivative markets exist 
however, for example the Philadelphia Stock Exchange in the United 
States, not all derivatives on all currencies are traded. Derivatives are 
available only on select major world currencies. While the existence of 
ese markets assists in risk management, speculation and arbitrage also 
t ive m them. This section compares and contrasts the use of 
derivatives - forwards, futures and options - and the gold dinar for 
hedging foreign exchange risk. It also argues why a gold dinar system is 
Ikely to introduce efficiency into the market while reducing the cost of 
hedging against foreign exchange risk, compared with the derivatives 

The Theft of Nations — Returning to Gold 

Hedging with Forwards 

Hedging refers to managing risk to an extent that it is bearable. In 
international trade and dealings foreign exchange plays an important 
role. Fluctuations in foreign exchange rates can have significant 
implications on business decisions and outcomes. Many Internationa 
trade and business dealings are shelved or become unworthy due to 
significant exchange rate risk embedded in them. Historically, the 
foremost instrument used for managing exchange rate risk is the 
forward rate. Forward rates are custom agreements between two 
parties to fix the exchange rate for a future transaction. This simple 
arrangement easily eliminates exchange rate risk, however, it has some 
shortcomings, particularly the difficulty in getting a counter party who 
would agree to fix the future rate for the amount and at the time peno 
in question. In Malaysia many businesses are not even aware that some 
banks do provide forward rate arrangements as a service to their 
customers. By entering into a forward rate agreement with a bank, the 
businessman simply transfers the risk to the bank, which will now 
have to bear this risk Of course, the bank, in turn, may have to make 
some other arrangement to manage this risk. Forward contracts are 
somewhat less familiar, probably because no formal trading facility, 
building or even regulating body exists. 

An Example of Hedging Using Forward Agreement 

Assume that a Malaysian construction company, ABC Corporation just 
won a bid to build a stretch of road in India. Now is July and the 
contract signed for 10,000,000 rupees, would be paid for in September. 
This amount is consistent with ABCs minimum revenue of 
BMl ,000,000 at the exchange rate of RM0.10 per rupee. Nonetheless, 
fluctuating exchange rates could end with a possible depreciation of 


Appendix F 

rupees and thus render the project unworthy. ABC, therefore, enters 
into a forward contract with the First Bank of India to fix the exchange 
rate at RM0.10 per rupee. The forward contract is a legal agreement 
and, therefore, constitutes obligations on both sides. The First Bank 
may have to find a counter party for this transaction — either a party 
that wants to hedge against an appreciation of 10,000,000 rupees 
expiring at the same time or a party that wishes to speculate on an 
upward trend in rupees. If the bank itself plays the counter party, then 
the risk would be borne by the bank. The existence of speculators 
inci eases the probability of finding a counter party. By entering into a 
forward contract ABC is guaranteed of an exchange rate of RM0.10 per 
rupee in the future, irrespective of what happens to the spot rupee 
exchange rate. If the rupee were to actually depreciate, ABC would then 
be protected. However, if it were to appreciate, then ABC would have 
to forego this favourable movement and hence bear some implied 
losses. Even though a favourable movement could be lost, ABC still 
proceeds with the hedging since it knows that a “guaranteed” exchange 
rate of RM0.10 per rupee is consistent with a profitable venture. 

Hedging with Futures 

The futures market came into existence as an answer for the 
shortcomings inherent in the forward market. The futures market 
solves some of the shortcomings of the forward market, particularly the 
need and the difficulty in finding a counter party. A currency futures 
contract is an agreement between two parties to buy or sell a particular 
currency at a future date, at a particular exchange rate that is fixed or 
agreed upon upfront. This sounds a lot like the forward contract. In 
fact, the futures contract is similar to the forward contract but is much 
more liquid. It is liquid because it is traded in an organized exchange 


The Theft of Nations — Returning to Gold 

i.e. the futures market. Futures contracts are standardized contracts and 
thus are bought and sold just like shares in a stock market The futures 
contract is also a legal contract just like the forward, however, the 
obligation can be ‘removed’ prior to the expiry of the contract by 
making an opposite transaction, i.e. if one had purchased a futures 
contract then one may exit by selling the same contract. When hedging 
with futures, if the risk is an appreciation in value, then one needs to 
buy futures, whereas if the risk is a depreciation then one needs to sell 
futures. Consider our earlier example, instead of using forwards, ABC 
could have thus sold rupee futures to hedge against a rupee 
depreciation. Let’s assume accordingly that ABC sold rupee futures at 
the rate RM0.10 per rupee. Hence the size of the contract is 
RMl ,000,000. Now assume that the rupee depreciates to RM0.07 per 
rupee — the very thing ABC was afraid of (See Table 4). ABC would 
then close the futures contract by buying back the contract at this new 
rate. Note that in essence ABC bought the contract for RM0.07 and 
sold it for RM0.10. This gives a futures profit of RM300,000 [(RM0.10- 
RM0.07) x 10,000,000]. However, in the spot market ABC gets only 
RM700,000 when it exchanges the 10,000,000 rupees at RM0.07. The 
total cash flow, however, is maintained at RMl, 000, 000 (RM700,000 
from spot and RM300,000 profit from futures). With perfect hedging 
the cash flow would always be RMl million no matter what happens to 
the exchange rate in the spot market. One advantage of using futures 
for hedging is that ABC can release itself from the futures obligation by 
buying back the contract anytime before the expiry of the contract. To 
enter into a futures contract a trader, however, needs to pay a deposit 
(called an initial margin) first. Then his position will be tracked on a 
daily basis so much so that whenever his account makes a loss for the 

Appendix F 

day, the trader will receive a margin call (also known as variation 
margin), requiring him to pay up the losses. 

Table 4: Outcome of Hedging using Currency Futures 

Cash Market Futures Market 


ABC Corp. expects to have 10,000,000 
rupees in September. 

Currently, the rupee exchange rate is 
RM0.10 per rupee. 


Exchanges the 10,000,000 rupees in the 
spot market for RM0.07. 

Value in ringgit: 

10,000,000 @ RM0.07 = RM700,000 

Plus futures profit: 

RM700,000 + RM300,000 = 

RMl, 000, 000 


ABC sells 5 September rupee futures 
contracts at RM0.10 (Assuming each rupee 
futures contract size is 2,000,000 rupees) 

Total underlying value of the futures: 

5x2 mil. x 0.10 = RMl ( 000,000 


ABC buys 5 September rupee futures 
contracts at RM0.07 

Total underlying value of the futures: 

5x2 mil. x 0.07 = RM700,000 

Futures profit: 

1,000,000 - 700,000 = RM300.000 

Standardized Features of the Futures Contract and Liquidity 

Unlike the forward contract, the futures contract has a number of 
features that have been standardized. These standard features increase 
the liquidity in the market, i.e. increase the number of transactions that 
match in terms of size and expiration. In the practical world, traders are 
faced with diverse conditions that need diverse actions (like the need to 
hedge different amounts of currency at different points of time in the 
future) such that matching transactions can be difficult. By 
standardizing the contract sizes (i.e. the amount) and the expiry dates, 
these different needs can be matched to some degree, even though not 
perfectly perhaps. Some of the standardized features include the expiry 


The Theft of Nations — Returning to Gold 

date, contract month, contract size, position limits (i.e. the number of 
contracts a party can buy or sell) and price limit (i.e. the maximum daily 
price movements allowed). Nevertheless, these standardized features 
introduce some hedging imperfections. In our earlier example, 
assuming the size of each rupee futures contract to be 2,000,000, then 5 
contracts need to be sold for a contract size of 10,000,000 rupees. 
However, if the size of each contract is 3,000,000 for instance, then only 
3 contracts can be sold, leaving 1,000,000 rupees unhedged. Therefore, 
with standardization, some part of the spot position can go unhedged. 
Some advantages and disadvantages of hedging using futures are 
summarized below: 

Advantages of the futures contract 

• Liquid and central market. Since futures contracts are traded on a 
central market, this increases liquidity. There are many market 
participants and hence one may easily buy or sell futures contracts. 
The problem of double coincidence of wants that could exist in 
the forward market is greatly reduced. A trader who has taken a 
position in the futures market can easily make an opposite 
transaction and thereby close his or her position. However, such 
easy exit is not a feature of the forward market. 

• Leverage. Leverage is brought about by the futures market s 
margin system, where a trader takes on a larger position with only 
a small initial deposit. If the futures contract with a value of 
RMl,000,000 requires an initial margin of only RM100,000, then a 
one per cent change in the futures price (i.e. RM10,000) would 
bring about a 10 per cent change relative to the trader’s initial 
outlay. This amplification of profits (or losses) is called leverage. 
Leverage allows the trader to hedge much bigger amounts with 
smaller outlays. 

• Positions can be easily closed out. As mentioned earlier, 
positions taken in the futures market can be easily closed out by 

Appendix F 

making opposite transactions. If a trader had sold 5 rupee future 
contracts expiring in December, then the trader coul/dose thar 
position by buying 5 December rupee futures. In hedging such 
closing-out of positions is done close to the expected physical SDO t 
transactions. Profits or losses from futures would offset the ? 
opposite losses or profits from the spot transaction. Nevertheless 
such offsetting may not be perfect due to the imperfections 
brought about by the standardized features of the futures contract 
Convergence. As the futures contract approaches expiration, its 
price and the spot price would tend to converge. On the day of 
expiration both prices should be equal. Convergence is brought 
about by the activities of arbitrageurs who would move in to profit if 
price disparities were to exist between the futures and the spot i.e. 
uying in the cheaper market and selling in the higher priced one. 

Disadvantages of the futures contract 

Legal obligation. The futures contract, just like the forward 
contract, is a legal obligation. Being a legal obligation it can 
sometimes pose problems. For example, if futures are used for 
hedging a project that is still in the bidding process, the futures 
position can turn into a speculative position in the event the 
bidding turns out unsuccessful. 

• Standardized features. Since the futures contract has some of its 
features standardized like the contract size, expiry date, etc., perfect 

edging may be impossible. Since over-hedging is also not 

advisable, some part of the spot transactions will, therefore, have to 
go unhedged. 

• Initial and daily variation margins. This is a unique feature of the 
futures contract. A trader who wishes to take a position in the 
utures market must first pay an initial margin or deposit. This 
deposit will be returned when the trader closes his or her position 
Also, the futures contract is marked to market, i.e. its position is 
tracked on a daily basis and the trader would be required to pay up 
variation margins in the event of daily losses. The initial and daily 
variation margins can pose a significant cash flow burden on 
traders or hedgers. 


The Theft of Nations — Returning to Gold 

• Forego favourable movements. In hedging using futures, any 
losses or profits in the spot transaction would be offset by profits 
or losses from the futures transaction. Consider our earlier 
example where ABC sold rupee futures to protect against a rupee 
depreciation. However, if the rupee were to appreciate, then ABC 
would have to forego such favourable movements. 

The above shortcomings of the futures contract, particularly it 
being a legal obligation, with margin requirements and the need to 
forego favourable movements, prompted the development and 
establishment of the options markets that deal in more flexible 
instruments, i.e. the options contracts. 

Hedging using Options 

A currency option may be defined as a contract between two parties 
a buyer and a seller — whereby the buyer of the option has the right 
but not the obligation, to buy or sell a specified currency at a specified 
exchange rate, at or before a specified date, from the seller of the option. 
While the buyer of an option enjoys a right but not an obligation, the 
seller of the option, nevertheless, has an obligation in the event the 
buyer exercises the given right. There are two types of options: 

• Call option — gives the buyer the right to buy a specified currency 
at a specified exchange rate, at or before a specified date. 

• Put option — gives the buyer the right to sell a specified currency 
at a specified exchange rate, at or before a specified date. 

The seller of the option, of course, needs to be compensated for 
giving the right. The compensation is called the price or the premium 
of the option. The seller thus has an obligation in the event the right is 
exercised by the buyer. 

Appendix F 

For example, assume that a trader buys a September RM0.10 rupee 
call option for RM0.01. This means that the trader has the right to buy 
rupees for RM0.10 per rupee at anytime until the contract expires in 
September. The trader pays a premium of RM0.01 for this right. The 
RM0.10 is called the strike price or the exercise price. If the rupee 
appreciates over RM0.10 anytime before expiry, the trader may exercise 
his right and buy it for only RM0.10 per rupee. If, however, the mpee 
were to depreciate below RM0.10, the trader may just let the contract 
expire without taking any action since he is not obligated to buy it at 
RM0.10. In this case, if he needs physical rupee, he mayjust buy it in 
the spot market at the new lower rate. 

In hedging using options, calls are used if the risk is an upward 
trend in price, while puts are used if the risk is a downward trend. In 
our ABC example, since the risk is a depreciation of rupees, ABC 
would need to buy put options on rupees. If rupees were to depreciate 
at the time ABC receives its rupee revenue, then ABC would exercise 
its right and thereby effectively obtain a higher exchange rate. If, 
however, rupees were to appreciate instead, ABC would then just let 
the contract expire and exchange its rupees in the spot market at the 
higher exchange rate. Therefore, the options market allows traders to 
enjoy unlimited favourable movements while limiting losses. This 
feature is unique to options, unlike the forward or futures contracts 
where the trader has to forego favourable movements and there are 
also no limits to losses. 

Options are particularly suited as a hedging tool for contingent 
cash flows, as is the case in bidding processes. When a firm bids for a 
project overseas, which involves foreign exchange risk, the options 
market allows it to quote its bid price and at the same time protect 
itself from the exchange rate fluctuations in the event the bid is won. 


The Theft of Nations — Returning to Gold 

In the case of hedging with forwards or futures, the firm would be 
automatically placed in a speculative position in the event of an 
unsuccessful bid, without any limit to its downside losses. 

An Example of Hedging with Put Options 

Consider our ABC Corp. example. Instead of already having won the 
contract in question, let’s, however, assume that it is in the process of 
bidding for it — as is the common case in real life. ABC wants a 
minimum acceptable revenue of RM1, 000,000 after hedging costs, but 
ABC need to quote a bid price now. In this instance, ABC would face 
the exchange rate risk only upon winning the bid. Options fare better 
as a hedging tool here compared with forwards or futures due to the 
uncertainty in getting the contract. Assume that it is now July and the 
results of the bidding will be known only in September, and that the 
following September options quotes are available today: 

RM0.10 call @ RM0.002 
RM0.10 put @ RM0.001 

Assume that the size of each rupee contract is 2,000,000 rupees. 

The following is how ABC could make its hedging strategy: 

1. First, it needs to decide whether to buy puts or calls. Since ABC 
would receive rupees in the future if it won the contract, its risk is 
a depreciation of rupees. Therefore, it should buy puts. 

2. What should the bid amount be? To answer this question we need 
to compute the effective exchange rate after incorporating the price 
of put, i.e. RM0.10 minus RM0.001 which equals RM0.099. Now 
the bid amount is computed as RMl,000,000/RM0.099, which 
equals 10,101,010 rupees. 



HOW many put contracts should it buy? To answer this just take 
the bid amount and divide by the contract size i e ' J ^ 

10,101,010/2,000.000 equals 5.05. Since fractions of contracts are 
not allowed and we don’t over-hedge, 5 contracts are sufficient 
with some portion going unhedged. However, if we want to ’ 
guarantee a minimum revenue of RM1,000,000, we cannot tolerate 

any imperfecnons in the hedging. Therefore, in this example we 
should go for 6 contracts. ^ 

Wlut is the cost of hedging? The cost of hedging is computed as 

follows. 6 contracts X 2,000,000 per contract x RM0.001 equals 

RM12,000. This cost of hedging is the maximum loss possible 
with options. 

In September, ABC would have known the outcome of the bid 
and by then the spot rupee rate might have appreciated or depreciated 
Let’s look at two scenarios where the rupee appreciates to RM0.20 in 
one and depreciates to RM0.05 per rupee in the other. Table 5 shows 
the four outcomes possible and their cash flow implications. 

Tdbte 5: Possible Cash Flow Outcomes for Hedging using Options 

Rupee Depreciates to 
RM0.05 per rupe e 

Rupee Appreciates to 
RM0.20 per rupee 



Exchange die 10,101,010 rupees 
@RM0.05 = RM505.050.50 
Plus profit from options: 6 x 2,000,000 x 
(RM0.10-RM0.05) = RM 600,000 
Less cost of hedging = RM12.000 
Net Cash flow = RMl,093,050 
(which is more than the minimum 
required revenue of RM 1,000, 000) 

Exchange the 10,101,010 rupees @RM0 20 
= RM2,020,202 

Put options not worth exercising, 
therefore, just let them expire. 

Less cost of hedging = RM 12,000 
Net Cash flow = RM2.008.202 (In this 
case the option allows ABC to enjoy the 
favourable movement) 



In this case, the bid amount is not in 
consideradon. However, ABC could soil 
exercise its rights and realize a profit from 
the puts. 

Profit from options: 6 x 2,000,000 x 
RM0.05 = RM 600, 000 
-ess cost of hedging = RM 12,000 
Net Cash flow = RM578.000 

This is die worst case scenario that can 
lappen. The bid is lost and also the put 
option ends up being not profitable. ABC 
oses the premium paid = RM 12,000. This 
is the maximum loss possible. 


The Theft of Nations — Returning to Gold 

The above example illustrates how options can be used to 
guarantee a minimum cash flow on contingent claims. In the case the 
bid is won, a minimum cash flow of RM 1,000, 000 is guaranteed while 
allowing one to still enjoy a favourable movement if that does take 
place. If the bid is lost, the maximum loss possible is the premium paid. 

An example for hedging with the call option is when a firm bids to 
buy a property (e.g. land) in another country. Say, a company bids to 
buy a piece of land in Indonesia to plant oil palm trees. Assume that 
the bidding is in Indonesian rupiahs. Here the risk would be an 
appreciation of the rupiah. Therefore, buying call options on the 
rupiah would be the suitable hedging strategy. 

If one analyzes it carefully, the options market is simply an 
organized insurance market. One pays a premium to protect oneself 
from potential losses while allowing one to enjoy potential benefits. An 
analogy, for example, is when one buys car insurance, by paying the 
premium. If the car gets into an accident one gets compensated by the 
insurance company for the losses incurred. However, if no accident 
happens, one loses the premium paid. If no accident happens but the 
value of the car appreciates in the secondhand market, then one gets to 
enjoy the upward trend in price. An options market plays a similar role. 
In the case of options, however, the seller of an option plays the role 
akin to an insurance company. 

Advantages and Disadvantages of Hedging using Options 

The advantages of options over forwards and futures are basically the 
limited downside risk and the flexibility and variety of strategies made 
possible. Also in options there is neither the initial margin nor the daily 
variation margin since the position is not marked to market. This 
relieves traders from potential cash flow problems. 


Appendix F 

Options are, however, more expensive because they are much 
more flexible compared to forwards or futures. The option price is, 
therefore, probably its disadvantage. 

The Gold Dinar 

Some readers by now would have realized that the examples of rupee 
and rupiah futures and options are hypothetical. There are no such 
derivatives traded on any organized exchange. But that is precisely the 
point we intend to highlight. Currently, derivatives are mostly traded 
only in select major world currencies like the yen, pound sterling, 
Australian dollar, etc. against the US dollar. For most other currencies 
of the world including almost all of the developing nations there are no 
formal tools to hedge against foreign exchange risk. Malaysia, Thailand 
Indonesia, the Philippines, India, etc. are no exception to this. 

The use of the gold dinar to settle their bilateral and multilateral 
trade is expected to introduce some stability into the foreign exchange 
problem. In this mode, gold is used as a medium of exchange instead 
of the national currencies. The prices of exports and imports are 
quoted in weights of gold. If countries use the gold payment system, 
then the problem of foreign exchange risk can be significantly 
minimized or eliminated. 

Hedging using the Gold Dinar 

In the gold dinar mode, the central bank would play the important role 
of keeping national trade accounts and providing a safe place to keep 
the gold. The gold accounting is Kept through the medium of the 
central banks and only the net difference between the countries is 
settled periodically, say, in a gold custodian’s account. However, since 
international trade is an ongoing continuous process, any gold that 


The Theft of Nations — Returning to Gold 

needs to be settled can always be brought forward and used for future 
transactions and settlements. 

As an example, consider that Malaysia exports 10 million gold 
dinar worth of goods and services to Indonesia while importing 8 
million worth of goods and services. Hence Malaysia has a surplus 
trade of 2 million gold dinar. Indonesia needs to settle only this 
difference of 2 million. However, this amount could be used for 
settling future trade imbalances between the countries and hence a 
physical gold movement between the countries is not necessary. This 
simple structure completely eliminates exchange rate risk if all pricings 
are done in gold dinar. 2 Even though the international gold price may 
fluctuate, the participants realize that they are dealing in something that 
has intrinsic value, that can be used for stable and continuous trade 
into the future. Therefore, even though with the existence of other 
national currencies, speculation and arbitrage on gold price could 
tempt a participating country to redeem or sell its gold, it should resist 
such temptation for the sake of the stability of future trade. 

This simple gold payment system has numerous advantages: 

1 Foreign exchange risk would be totally eliminated if a 

comprehensive gold dinar model is implemented. This means 
there is no need for forwards, futures or options on the 
currencies of the participating countries. 

2. Reduced currency speculation and arbitrage between the 

currencies. For example, if three countries agree to use the gold 
payment system, then it is akin to the three currencies 
becoming a single currency. Speculation and arbitrage among 
these three currencies will be veiy much reduced. This 
unification of the three currencies through the gold dinar 

2 With the coexistence of national currencies though, some price risk may still oast 
Nevertheless, gold has it own intrinsic value and thereby has held ,<s value stable - 

historically. j 


Appendix F 

provides benefits of diversification. It is like obtaining 
diversification through a portfolio of stocks. Individual 
currencies face risks that are unique to the issuing country, but 
in a unified currency such unique risks would be diversified 
away. In fact, since gold is treasured by all people, it is a suitable 
global currency that enjoys global diversification, i.e. no single 
country’s unique risk may be significantly embedded in gold. 

3. Low transaction costs since only accounting records need to be 
kept. Transactions can be executed by means of the electronic 
medium with minimal charges. 

4. Greatly reduces the possibility of future speculative attacks on 
national currencies. 

The cost and benefits of using forwards, futures, options and the 
gold dinar for hedging foreign exchange risk are compared and 
summarized in Table 6. 

In the final analysis, the gold dinar is akin to the forward contract, 
but with its problems of “barter”, speculation and arbitrage removed; 
and is a superior tool for foreign exchange risk management compared 
to the futures and options contracts. 


The Theft of Nations — Returning to Gold 

Table 6: Fonvards , Futures, Options and Gold Dinar as Tools for 
Managing Foreign Exchange Risk: A Comparison 




Gold Dinar 








Variation Margin 





Need for Speculators 
to assume the risks 
that hedgers seek to 

No, but 
could be 




Forego favourable 









No. Both parties have 
real spot transactions 





No, but can be possible 
with the co-existence 
of national currencies 
and lack of regulations. 

“Barter” problems 





Cost/Broke rage fee 












Liquid market 





Can hedge any 

Yes. Counter 
party may be 
difficult to find 




Legal obligation 





Appendix G 

Some Basic Facts about Gold 

THE CHEMICAL SYMBOL of gold is AU from Aurum, the Latin word 
for gold. Chemically gold is an element, which means it cannot be 
broken down further. Interestingly, in the Periodic Table ofElements 
(below) gold occupies the same group, i.e. Group 11, as copper (Cu) 

and silver (Ag) that also played the role of money in the history of 

Periodic Table ofElements ' 

Groups - • . : ’ , 










































































































































































































! 7 





























I lull 































































The Theft of Nations — Returning to Gold 

• Pure gold is yellow in colour. Nevertheless, the colour changes 
depending on the added alloy metals, as illustrated below: 


Gold and Alloy metals 

Yellow Gold 

Gold, Copper, Silver 

White Gold 

Gold, Nickel, Zinc, Silver, Platinum 

Green Gold 

Gold, Silver, Copper, Zinc 

Red Gold 

Gold, Copper 

• Karat grade is used to express the purity of gold. It basically refers 
to the proportion of gold in an alloy. Pure gold (100 per cent) is 24 
karat. The proportions in other karat are as in the table below. 


Parts Gold to Alloy 























Example: 22K means that 22 out of 24 portions are gold. This 

equals 91.66 per cent of go Id, hence it is also known as 
916 gold. Similarly 18K contains 75 per cent gold. 

• As an element, gold cannot be further broken down by chemical 
means. Hence it is indestructible and permanent. 

• Gold is also such an inactive metal that it is not affected by air and 
water, i.e. does not oxidize (tarnish, rust or corrode). Gold artefacts 
unearthed in the Egyptian pyramids still look new and bright. 

• Gold is highly malleable (i.e. the ability to be pound into thin 
sheets) such that a single ounce of gold can be hammered into a 
100 square-foot sheet. 


Appendix G 

• Gold can be hammered so thin that sunlight can shine through it. 
A pile an inch high can contain more than 200,000 sheets! 

Gold reflects infrared rays while allowing sunlight to pass through 
hence its use in astronaut helmets and window glass. 

• Gold is most ductile (ability to draw out into wire) that a single 
ounce of it can be drawn out into a 50-mile long wire! 

• Gold is so rare that only about 90,000 tons of it have been taken 
from the earth in recorded history. 

• South Africa is the largest gold producing country in the world. 

Other leading producers include Russia, Canada, and the United 

• Gold is so heavy that one cubic foot of it weighs half a ton. 

• All the gold in the world could be compressed into an 18-yard 

• Gold has been used by man for more than 6000 years. 

• In 1933, President Franklin D. Roosevelt banned the private 
ownership of gold, which was then lifted on December 31, 1974. 

• Gold reached an all-time high price of $800 per ounce in 1980. 

• Gold is said to be a cure for rheumatoid arthritis. It is chemically 
liquefied and injected into the muscles of arthritic patients. It is 
said that the treatment is successful in seven out of ten cases. 



Appendix H 

Speech by The Prime Minister Of Malaysia 
The Hon Dato’ Seri Dr Mahathir Bin Mohamad 
at the Gold Dinar in Multilateral Trade Seminar 
BOM Hall, Kuala Lumpur 
On October 23, 2002 

I would like to thank the organisers for inviting me to speak at this 
seminar on the Gold Dinar in Multilateral Trade. I hope I can help to 
make clear the idea and the concept of the Gold Dinar. 

For some time now the Muslims and their countries have become 
synonymous with backwardness, authoritarian and frequently unstable 
governments and lately with terrorists and terrorism. Yet Islamic states 
were not like that before, nor were Muslims involved in acts of terror. 
In fact Muslim countries were where the persecuted of Europe, in 
particular the Jews, sought refuge. The pogroms and the inquisition in 
Europe forced the Jews to migrate to the Muslim countries in North 
Africa. Yet before that when Muslims ruled Spain, the Jews, the 
Christians and the Muslims were able to live together in peace. 

If today there is so much animosity between Jews and Muslims, it is 
not because of religious differences. The fact is that the Europeans 
who in the past never liked the Jews and massacred them every now 
and then, wanted to get rid of the Jews. Together with the Zionists 
they took Arab land in Palestine and gave it to the Jews for the setting 
up of the state of Israel. In the process the Palestinian Arabs were 
expelled from their homes and their land and ever since these people 
have been living in makeshift refugee camps in Lebanon and Jordan. 

When the Arabs attacked Israel in a conventional war, they were not 
only defeated but more of their land was seized by Israel. The Israelis 
were able to win because they were strongly supported by Europe and 
then America. Every time the Arabs fought to get back their land, they 

actually lost more land. 


Appendix H 

The conflict is therefore about land, not about religion as it is made out 
to be. If the Palestinians indulge in acts of terror today, if other 
Muslims indulge in acts of terror, it is because conventional war has 
become impossible for them. We do not condone acts of terror by 
anyone. Suicide bombing against civilians must be considered as acts of 
terror. So are the killings of Palestinian children and civilians by the 
Israeli armed forces — all are acts of terror. And the Israeli army is no 
less a terrorist organisation now as is Hamas, as was the previous 

Jewish Irgun Zvai Leumi, the Stem Gang and others, all are terrorist 

The events of September 11, 2001, have however focused the world’s 
eyes on Muslim terrorists and this has led to a very distorted view of 
Islam and the Muslims. This view has affected Muslims in all areas. 
They are being discriminated against everywhere. 

This unfortunate repercussion of September 11 has resulted in the 
whole world’s economy being unable to grow. And now, as a direct 
consequence we are being threatened by a war against Iraq, a Muslim 
country and a major oil producer. Without doubt this will make the 
economies of the world even less able to grow, especially those of 
Muslim states. 

The West and in particular the Americans are very angry. So are the 
Muslims. Angry people cannot act rationally. But if we want to solve 
the problem, we have to strive to be rational, to remain calm and not 
let emotions control us. 

At the moment most Muslims are only bent on revenge. They are 
hitting back because of anger. They do not seem to care whether they 
achieve ultimate success or not. Every time they hit, the other side 

would hit back. And eveiy time the other side hits back they would 
retaliate in kind. 


The question is how long will we go on like this. The Palestinians have 
been fighting for the past 50 years. Their position has not improved. In 
fact, it has become worse. In fact, the position of the Muslims 


The Theft of Nations — Returning to Gold 

worldwide has become worse. And if what is happening now is any 
indication, it would continue to be so for decades. The Muslims of this 
world, all 1.3 billion of them, will continue to be oppressed and 

There are, of course, some of us who believe that it is the fate of the 
Muslims to be oppressed in this world because in the akhirat we would 
be in heaven. If this is the fate of the Muslims, why did the Prophet 
strive to save the Muslims from the oppression of the Khuraish? Why 
did he and his followers migrate to Madinah; why did he unite the 
Ansars and the Muhajirin and gather them into a strong force in order ,, 
to repel the enemy? Indeed, Al-Quran enjoins the Muslims to equip 
themselves for their defence, to educate themselves, to achieve success 
in life even as they must seek merit for the hereafter, so they may 
impress the Jahilliah and spread the teachings of Islam. In a matter of 
100 years the Muslims had created a powerful Muslim world 
extending from Spain in the West to China in the East. 

Did the Prophet preach to his followers that they should suffer in 
silence because for them there will be heaven in the next world? In 
fact, he prepared them to defend Islam with their wealth and their 
lives, to defeat the enemy. He did not advocate just seeking revenge 
upon the enemy in anger through attacks and killings. 

It is clear that we Muslims are openly and blatantly ignoring the clear 
teachings of our religion in favour of quarrelling over contentious 
issues and interpretations while ignoring the oppression by the 
enemies of Islam, while failing to prepare for the defence and safety of 
the ummah and Islam. 

One of the clearest teachings of Islam is that all Muslims are brothers 
and that no one should question the religion of anyone as long as he 
takes the oath that “there is no God but Allah and Muhammad is His 
Prophet.” The split amongst the Muslims into hundreds of different 
sects is due to the denial of the Islam of rival groups in order to justify 
the fight against them. 

Appendix H 

All who submit to “Allah and His Prophet” must be considered as 
Muslims and must be brothers of each other. Race and nations and 
borders should not stand in the way of Muslim unity nor should 
ideologies and political parties. There is only one Islam that was 
brought by the Prophet. The breakup of the Muslims into sects and 
groups all occurred after the death of the Prophet. It follows that the 
differences in the interpretations of Islam, differences which lead to the 
many splits and the formation of splinter groups, which are opposed to 
each other, is due to different interpretations of the teachings of Islam. 
But we all subscribe to the basics and it is a basic creed of Islam that all 
Muslims are brothers. If we can forget our differences in the 
interpretations of Islam, if we go back to the basics which we all accept 
then it is possible for us to unite. Certainly now, when the Muslim 
ummah everywhere is threatened and oppressed, when our holy places 
are being desecrated, when we are so weak and poor, particularly poor 
in knowledge and skills in this age of technology, certainly now we 
must forget our differences and unite. 

However, our unity should not be for the purpose of futile attacks on 
the enemy. We should unite in order to build up our capacity and our 
strength. Simply by being united and strong, we would be freed from 
oppression. It will take time but Allah has enjoined upon us to be 

“Innallah hamaassabirin”. The Prophet was patient; He did not seek 
revenge for the humiliation and oppression he was subjected to. He 
retreated to a safer place in order to build up his strength. And he 
created sufficient wealth among his followers to support his struggle to 
return to Makkah. 

We have to do the same. The Muhajirin and the Ansars among us 
must unite, must build up our capacities in terms of wealth and 
technology, in terms of stable Islamic communities, in terms of 
following all the undisputed injunctions of Islam. 

Pure materialism is abhorred by Islam but there is no injunction 
against the legitimate acquisition of wealth. Tithes must be paid on our 



The Theft of Nations — Returning to Gold 

wealth but we are also enjoined to be charitable. We know that the 
third Caliph, Saidina Othman, was wealthy. During the campaigns y 
the Prophet he donated camels and other supplies for the defence of 

the Muslims. 

If the Muslims are going to protect themselves, they must have 

sufficient wealth. Allah has endowed Muslim countries wit 

inexhaustible wealth. These need to be administered for the good of 
the ummah. 

But wealth can also be acquired through commercial activities, 
through the production and distribution of goods and services and 

through trade. 

Today trade between Muslim countries is small. It is not suggested 
that we reduce our trade with the non-Muslims. But we should 
endeavour to increase the trade between Muslim countries. 

We can trade through the exchange of goods,. through barter. But 
today we use money. Since we don’t have a currency which is strong 
enough and stable enough in exchange rate terms, we have to use the 
American dollar. But the dollar is also not stable. Today the dollar has 
depreciated against many other currencies. This means that despite e 
increase in the price of oil for example, we are actually earning less due 
to the devaluation of the dollar. It is the same with die other 
currencies. It is the same with our own currencies. They all fluctuate 
in value. And they are all subject to speculation and manipulation as 
happened in Malaysia and other East Asian countries, in Russia an m 

Latin America. 

The reason for this is that paper currency has no intrinsic value. You 
can print any figure you like on currency notes but in exchange rate 
terms the figure means nothing. The Malaysian nnggt : is 3.8 to one 
U S Dollar. The Turkish Lira is 1.5 million to one U.S. Dollar. I ne 
Indonesian rupiah is 9,000 to one U.S. Dollar. The purchasing power 
within the country is different from the purchasing power outside the 
country. Sometimes countries have as many as four exchange rates 


Appendix H 

one official, one for the domestic economy, one for export and one for 

Clearly this situation in terms of international finance is chaotic and 
anarchic. But since the system benefits the powerful countries they are 
unwilling to correct it. 

If we want to avoid being short-changed, we must have a currency that 
has intrinsic value. Gold does fluctuate in price but the fluctuation is 
minimal. It is not possible to devalue gold by one hundred per cent or 
one thousand per cent. Nor is it possible to revalue gold by the same 
percentage. The fluctuation in the value of gold can only be by a few 
percentages, up or down. 

When the Allied nations met in Bretton Woods to determine the 
principle for the rate of exchange of international currencies in order to 
facilitate trade, they decided to use gold as a standard. The value of the 
U.S. Dollar was fixed at one dollar for 1/35 ounce of gold or 35 U.S. 
Dollars per ounce. All other currencies were valued in gold through 
the rates of exchange with the U.S. Dollar. 

This worked quite well until some countries wanted to devalue their 
currencies in order to become competitive in the international market. 
Then other countries also decided to devalue in order to remain 
competitive. Finally, the U.S. Dollar was devalued against Gold. 

At this stage the gold standard could not be sustained. The market 
claimed that it could determine the exchange rate through the demand 
and supply of currencies freely traded in the market. But profiteers 
moved in and they manipulated the value of the currencies so that 
there was chaos in terms of the exchange rates of currencies. Business 
became very difficult. Indeed, many good businesses went bankrupt 
when the domestic currency got devalued. The hedge Funds which 
claim to insure the value of the currencies made huge sums of money 
speculating and manipulating the values of the currencies. 


The Theft of Nations — Returning to Gold 

This anarchy in the international financial regime will remain because 
it benefits the rich and the powerful. If we want to protect ourselves^ 
we must evolve our own payment system, our own trading currency. 

The Gold dinar can provide the currency for trade between nations. If 
we value all trade items against gold, then we will have no problem 
with the exchange rate. We know that in the last resort we can melt the 
gold and sell it in the market. You obviously cannot do that with paper 
currency, worst still with figures on a computer. They have no 
intrinsic market value as gold has. 

But gold is bulky. We cannot be carrying gold all over the world l in 
order to pay for goods we want to import. But we need not do that. 

It is not intended to use the gold dinar as currency for everyday 
transactions in the domestic market. For this we can use nation 
currencies. If there is inflation then the currency can buy less gold and 
other goods. And vice versa. So there is no necessity to carry bags of 
gold coins for transactions within the countries. 

But even for international trade the transport of gold bullions or gold 
coins would be very minimal. Through bilateral payments 
arrangements the imports can be balanced by the exports and the 
differences settled in gold dinars. The Central Bankcan provide a 
guarantee for the gold required for the payments of the balance Jn the 
following weeks or months the deficits may be reduced ora rp 
achieved. In that case the payments of the balance can be ma e 
through accounting arrangements between the Central Banks.Itis 
only occasionally that a necessity might arise for the actual gold dina 
to be used to pay for the purchase of imports. 

We cannot really verify the amount of money a country has. A 
country’s own currency cannot be regarded as its reseive. But gold 
dinars or gold bullion or gold ingots can serve as a country s ieserve. 
Still in the end we have to trust each other. If we are good Muslims, 
then the cases of fraud by Central Banks would be minimal. 

Appendix H 

Assuming that Malaysia exports to a Dinar Area country a hundred 
million Dinars worth of motor vehicles and then imports 110 million 
dinars worth of oil, then the payment required by Malaysia would be 
just 10 million dinars. The ten million dinars is credited to Malaysia’s 
trading partner. If in the following month the trading partner buys 110 
million dinars worth of Malaysian cars and Malaysia buys 100 million 
dinars worth of oil, then no payment needs to be made by either party. 
The 10 million dinars that has to be paid by Malaysia’s trading partner 
for the motor vehicle can be offset by the credit of 10 million dinars 
from the previous month’s transactions. 

Today with computers we can close account and pay more frequently. 
Through this method it is not necessary to purchase or earn hard 

Of course, there may be some countries which are so poor that they 
cannot have gold dinars. We can buy some raw materials to be paid in 
gold dinars. They can be helped to build up the reserves of gold dinars. 

There will be problems. But if we begin with just a pair of countries 
we would be able to minimise problems and demonstrate whether it 
works or not. We will be able to identify the weaknesses and the faults 
and correct them. 

Gold is a precious metal. There has never been a time when there was 
no demand for gold. It is also not so plentiful that its price will fall the 
way paper currency or even other precious metals can fall. Yet it is not 
so limited in quantity that anyone or any trader can corner it and 
manipulate the price. 

In different countries the price of gold will differ in terms of the 
currency of that country. That is a function of the currency of the 
countiy. The value of one gold dinar is one gold dinar no matter what 
the exchange rate of a currency is against the gold dinar. If the value of 
goods or services is expressed in gold dinar, the value remains the same 
no matter which country is involved in the trade. 


The Theft of Nations — Returning to Gold 

Thus an exporter can declare the agreed price in dinar to the importer 
in another country and to the Central Bank in his country. Depending 
on the agreement reached the Central Bank will pay the exporter the 
current local currency equivalent to the gold dinar price. At the 
importer’s end, he would pay to his country’s Central Bank the local 
currency equivalent of the agreed price in dinar. At the end of the week 
or month the Central Banks will total up the value in dinar of the 
exports and imports between the two trading countries. If they are not 
balanced then the country with a surplus will have a credit account 
against the country with a deficit. The difference can be paid in dinar 
or in goods or the country with the surplus can hold the dinar for 
future purchase from the country in deficit. 

In multilateral trade, the process may be a little more complicated but 
it is entirely, manageable. A clearing house can be set up for a group of 
trading countries and the deficits and surpluses balanced. The process 
is not unlike the clearing of the cheques of numerous banks at a central 
clearing house. 

Provided there are goods or seivices to be supplied by all participating 
countries, the amount of gold dinars that needs to be kept as reserve 
backing and for payment in the last resort is very small. Ideally, there 
would be no need to transport and pay in dinars. The imports and 
exports in most instances would cancel themselves. The profits come 
from disposing of the goods or services domestically when the local 
currency would be used. 

There will be problems of course. But there are problems now. 
Countries with no “hard currency”, i.e. U.S. dollars cannot pay for 
their imports anyway. In addition, the U.S. currency is not as stable as 
gold. Not only can it appreciate or depreciate widely, but a country’s 
currency can be made to depreciate so much against the U.S. Dollar 
that its imports cannot be paid for, priced as they are in U.S. Dollar. 
The gold dinar cannot depreciate much against the U.S. Dollar. 

Gold price can also be manipulated but not as easily as the U.S. Dollar 
or other currencies. No one can sell gold at below market price 


Appendix H 

because he just will not be able to deliver when called upon to do so. 
Short-selling will be very difficult if not impossible. 

However, local currency prices of gold can still fluctuate if left to the 
market. It is up to the country concerned whether to control exchange 
rates or not. But speculation and manipulation will not be as easy as 
when the local currency is valued against the U.S. Dollar. 

It must again be stressed that the Gold Dinar is exclusively for 
international trade. It is not to be used as local currency. In a sense it is 
like the U.S. Dollar now. Some countries, of course, use the U.S. 
Dollar locally for paying hotel bills by foreigners. But the dinar is heavy 
and cumbersome to carry. So it cannot be used as freely as the U.S. 
Dollar locally. This again lends credibility to the dinar and the local 
currency, which has to be used for local payment. 

We should not be. too ambitious as to launch the Gold Dinar for 
multi-lateral trade in one go. We should begin by pairing off the 
countries willing to use the Gold Dinar. A pair of good trading 
countiies with a fairly well balanced trade should initiate the use of the 
Gold Dinar. Problems that arise can be resolved and the system 
improved. After the bugs have been got rid of then the trade using the 
dinar can be expanded gradually to involve more countries. 

Traders in particular will be happy because their prices in Gold Dinar 
would not be affected by changes in the exchange rates of the 

importing countries or the exporting countries. In dinar, the prices will 
always remain the same. 

It is not the intention to make the dinar a common currency for all 
countries. It is not really the Gold Standard with a fixed value against 
local currency. If countries print more local currency, there would still 
be inflation within the country. But trade would be stable and 

enhanced. Speculators and manipulators will not be able to undermine 
international trade. 


The Theft of Nations — Returning to Gold 

Of course, the Gold Dinar can be a trading currency, for all countries, 
not necessarily Muslim countries. But Muslim countries are in the 
best position to demonstrate the viability of the system. They are in a 
position to manage their economies rationally and in the process show 
the world that they are capable of growing with stability and in peace. 
And this will do more towards countering oppression by their enemies 
than the futile violent retaliation. 



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‘What Caused the Asian Currency and Financial Crisis? Part II: The Policy Debate” 
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1997. / 



‘What Happened to Asia?” Paul Krugman (1/98) 



Abd al-Malik ibn Marwan, 74 
absolute advantage, 55, 58 
accounting money, 4, 30 
aggregate price level, 124 
agricultural, 26, 107 
agriculture sector, 76 
al-Ghazalli, 98 
al-Maqrizi, 98 

Amanah Saham Dinar Emas, 109, 

arbitrage, 26, 37, 44, 53-54, 56, 58, 
71,76-77, 81,96, 137-141,145, 

profits, 44, 55, 77, 137-138, 140- 

Argentina, 22-23, 142 

Asian Miracle, 59, 136 

asset price bubbles, 59, 75-76, 89, 


Australian dollar, 96, 157 
automated teller machines (ATM), 

automatic adjustment, 31 

balance sheet, 16-17, 130-131, 133 

banana leaf money, 124 


conventional, 34, 53 
discount rates, 135 
failures, 23, 76 
mergers, 40 

money, 4, 11, 17-18, 102, 133 
Bank for International Settlements 
(BIS), 51, 118 
Bank Negara Malaysia, 91 
Bank of England, 91 

bankcards, 39 
banking crisis, 133 
banking system, 8, 12, 24, 33, 43, 
53-54, 58, 133 

bankruptcies, 19, 26, 60, 77, 107 

economy, 66-68 
trade, 5, 7, 66, 92 
basic necessities, 26, 67, 107 

commodities, of 70 
currencies, of, 70, 97 
battles, 83-84 
bay ad-dayn, 58 
beta, 20 

bezant gold coin, 74 
bid price, 153-154 
bilateral, 82, 85, 88, 91, 95, 99, 101, 
119, 157, 170 

Bilateral Payment Arrangements 
(BPAs), 87 
bimetallism, 112 
bonds, 48-49, 135 
Brazil, 23, 142 

Bretton Woods, 31, 59, 61, 67, 78, 
81, 169 

broad money, 103 
bubbles, 59, 76 

cycles, 26, 36-37, 75-76, 98, 
failures, 26, 36, 38, 59, 76 
risk, 19-20, 22 

call option, 152 
Canada, 163 

adequacy ratio, 120, 130 



controls, 25 

structure, 13, 18-19, 60, 77 
capitalist system, 101 
cashflow, 13, 18-19 
cashless, 39-40 

bank, 35, 75, 88-90, 94-95, 98, 
113, 119-120, 157, 170, 172, 

central market, 150 
charge cards, 109-110 
Chase, J.P. Morgan, 51 
checkable deposits, 132 
chemical property of gold, 72 

labour, 27, 76 
neglect, 27 
China, 89, 142, 166 
Christian Council for Monetary 
Justice, 3 

Christianity, 10, 25 
circulation, 15, 26-27, 68-69, 74, 77, 
102, 105, 107, 111, 123, 178 
coins, 7, 11, 17, 21, 33, 40, 66, 72, 
74, 102-103, 109, 111-113 
collusion, 51 

colonialism, 24, 33, 83-84 
colonization, 60, 83-84, 98 
commercial banking, 16 

monies, 37, 48-49, 60, 69, 116 
prices, 80 

common currency, 31, 48, 71 * 77, 

comparative advantage, 55-56, 58 
competition for money, 8, 15 
complementary currencies, 48-49, 
70, 116, 119 

confiscation of real assets, 17, 25 
construction sector, 26-27 
consumer price index (CPI), 124 

convergence, 53-54, 58, 108 
copper fulus, 113 
correlation, 86, 125 
counterfeiting, 41, 44, 71, 108 
cowry shells, 71 
credibility, 103, 173 
credit cards, 108-109, 125, 176 
credit expansion, 89 
credit money, 4 
crime, 9, 27, 29, 76 
cross-currency rates, 141 
Crude Palm Oil Futures, 145 
culture, 9, 39, 77-78, 83-84, 98, 107 

derivative markets, 95, 145 
forwards, 96, 119 
futures, 96, 145, 147 
market, 44, 77 
single, 77, 96, 158 
single world, 119 
speculation, 44, 76, 81, 85, 137, 

current accounts, 110 
custodian, 79, 91, 105-106 

debit card, 105, 109-110 
debt bubbles, 75 
debt financing, 19 
debt levels, 19-20, 133 
debt money, 1 13 

default, 13, 17, 20-21, 23, 25, 35-36, 
91, 133-134, 181 
defence, 3, 84, 97, 166, 168 
Delaware, 51 
demand deposits, 123 
demurrage, 69, 111, 115 
denarius, 74, 111 

developing nations, 4, 10, 16, 24, 30, 
36-37, 44, 47, 51, 61, 65, 83-84, 

96, 98, 103,118, 145,157 


The Theft of Nations — Returning to Gold 

dinar, 48-49, 69, 74-75, 81-82, 84- 
89, 91-93, 95-98, 101, 103, 105- 
116, 120-121, 145, 157-159, 170- 
173, 180 

dirham, 81, 111-112 
Disney, Walt, 36 
diversification, 70, 97, 159 
dividend, 18-19 
dollar index, 86 

domestic transactions, 43, 76, 84-85, 
88, 101, 105-106, 108-109, 112, 
114-116, 119 

advantages of the gold dinar, 106 
double coincidence of wants, 66 
dual banking system, 108 
Duncan, Richard, 31 
East Asia, 22, 77, 89, 111, 136, 145* 
144, 168, 180 
economic colonialism, 84 
development, 24, 50 
efficiency, 67 
growth, 11-12, 119 
e-dinar, 3, 109-110, 112, 116, 120, 

education, 27, 39, 77, 83, 97, 107, 

e-gold, 3, 112, 120 
el-Diwany, Tarek, 10, 114-115 

card system, 110 
gold payment systems, 112 
money, 49, 67, 105, 109 
payment system, 105, 110, 116 
element, 72, 161-162 
employee savings, 109 
Employees Provident Fund (EPF), 
109, 116 
Enron, 22-23 

equation of exchange, 8, 11-12, 

equitable distribution of income, 

equity, 18-19 

euro, 31-32, 46, 71, 97, 119 
eurodollars, 31-32 
Europe, 3, 22-23, 46, 74, 118, 164, 
exchange rate 

risk, 88, 92, 95, 97, 146-154, 158 
disequilibrium, 139 
exchange rates, 31, 71, 77, 136, 138, 
140-141, 144, 146, 168-169, 173 
exporters, 88, 90, 98 
external trade, 84-85, 88, 90 
balances, 84 

Federal Reserve, 29, 51 
fiat money, 4, 10, 11, 16, 23-26, 29- 
30, 33, 35-38, 44, 46-50, 53, 58- 
60, 65, 69, 71, 73-81, 83-84, 87, 
98, 102-103, 107-108, 113, 115, 
117-118, 133-134, 136 

architecture, 39, 109 
assets, 47-49, 86 
crises, 22, 59, 103 
distress, 3, 22-23, 35, 
liberalization, 16, 24, 
management, 13, 
markets, 37, 136 
firm value, 19 
fiscal expenditure, 114 
fixed rate 
lending, 58 
market, 55-58 

exchange rates, 30 
rate market, 55-58 
foreign banks, 16, 24, 31, 47, 83, 



foreign debt, 97 
foreign exchange 
dealings, 44 
market, 141 

foreign financial giants, 16, 23-24, 

foreign reserves, 30, 97, 136 
Fort Knox, 94 
forward rates, 145 
fractional reserve banking, 4, 33, 

frauds, corporate, 60 
futures market, 147, 150-151 

Galbraith, John Kenneth, 3, 23 
GATA see Gold Anti-Trust Action 
German debt crisis, 118 
global • 

central bank (GCB), 118-119 
currency, 74, 84, 96-97, 108, 118, 

economic scenario, 101 
monetary system, 3, 5, 10, 26, 
29-30, 59, 81, 116, 137 
globalization, 16, 24, 78, 83-84, 98, 
114, 121 

accounts, 89-90, 106 
alloys, 72 
AU, Aurum, 161 
cartel, 51 

coin, 5-8,72, 74, 103, 111, 170 
custodian accounts, 108 
dinar economy, 82, 111, 115-116 
dinar, advantages, 95, 106 
dinar, objections to, 78 
market, 51, 86, 95 
ornaments, 103 

payment system, 61, 81-82, 96- 
98,112,115-116,119, 121, 
pure, 162 

reserves, 78, 94-95, 114 
savings, 116 
silver money, and 70 
standard, 31, 59, 78, 89, 115, 169, 
173, 176-178 
store of value, 68, 72, 108 
Gold Anti-Trust Action (GATA), 


goldeconomy, 3, 112 
goldmoney, 3, 112, 120 
goldsmiths, 105 
government bonds, 135 
Great Depression, 3 
Gresham’s Law, 102, 111 

health, 27, 83 
hedge funds, 36-37 
cost of, 145, 155 
currency risk, 95 
foreign exchange risk, 96, 119, 
144-145, 159 
tool, 153-154 
using the gold dinar, 157 
with forwards, 154 
with options, advantages of, 156 
with put options, 154 
hoarding, 68 

Holy Scriptures, 10, 26, 126 
home financing, 54 
housing, 27, 54, 76, 107 
' Hugo, Victor, 117 
hyperinflation, 75, 125 
hyperinflationary, 31 


The Theft of Nations — Returning to Gold 

Ibn Khaldun, 98, 177 
IFSB see Islamic Financial Services 
ijarah, 58 

importers, 88, 90, 98 

disparity, 27 
distribution, 15, 27, 102 
index options, 145 
Indonesia, 39, 111, 142, 156-158 
industrial land, 26 
inequality, 76, 102 

in distribution of income, 76 
infrastructures, 114 
initial margin, 96, 148, 150-151, 156 
instability, 59, 69, 117 
interest, consequences of, 1 1 
interim payments, 54 
bankers, 36 
banks, 35 

international borrowing, 36 
international debt, 118 
international financial institutions, 
36, 38, 40, 50-51, 59, 76, 94, 118- 
119, 136 

international indebtedness, 50 
international lending, 37 
international market, 112, 169 
International Monetary Fund 
(IMF), 24-25, 50, 84, 118-120, 


international monetary order, 80 
international monetary unit, 61 
international trade, 4, 30, 48-49, 51, 
58, 73, 76-77, 81, 87-88, 92, 
94-95, 98, 105, 108, 112, 119, 
144, 146, 157, 170, 173 
balances, 4, 51, 81 
settlements, 48 

Internet financial services provider 
(IFSP), 105-106 

intrinsic value, 4, 59, 60, 65-67, 69, 
71-72, 74-75, 84, 97, 103, 158, 

investment, 18, 54-55, 68, 79, 109 
Iraq, 46-47, 165 
Iraqi dinar, 46, 103 
iron oxide, 72 

Islam, 10, 25-26, 113, 165-167, 176, 

Islamic banking system, 58, 120 
Islamic banks, 40, 53, 58, 108, 120 
Islamic Development Bank (IDB), 
91, 120 

Islamic dinar, 74, 88, 120, 175, 177, 

Islamic financial products, 53 
Islamic Financial Services Board 
(IFSB), 40 
Islamic money, 82 
Islamic principles, 54, 58, 120 
Islamic world, 74, 112 f 

Japan, 3, 22-23, 46-47, 49( 89, 118, 
177 / 


banking crisis, 115 
Occupation (of Malaya), 124 
Judaism, 10, 25 
justice, 26, 61, 65, 74, 99, 120 

Karat, 74, 162 
Keynesian, 123, 178 
KLIBOR, see Kuala Lumpur 
Interbank Offer Rate 
knowledge, 27, 36-37, 50, 79, 136, » 



Kuala Lumpur Composite Index 
(KLCI), 20, 145 

Kuala Lumpur Composite Index 
Futures, 145 

Kuala Lumpur Interbank Offer 
Rate (KLIBOR), 55-57, 145 

labour, 13, 37 

lack of money, 24, 26-27, 38, 107 

late payment fee, 135 

Latin America, 22, 25, 38, 168 

Law of One Price, 53 


agreement, 147 
obligation, 151-152 
• structure, 77 

legal tender, 46, 48-49, 67, 74, 101 
Lembaga TabungHaji, 109, 111 
LETS schemes, 119 
leverage, 150 
leveraged positions, 136 
Lietaer, Bernard, 3, 10, 28, 37, 70, 
115, 141 

liquidity, 59, 96, 117, 149-150 

Mahathir Mohamad, 4, 85, 87 121 

Malaysia, 3, 16, 24, 37, 39, 40, 53, 
70, 82-85, 87, 89, 91-93, 96, 109, 
111, 120-121, 125, 143-144, 146, 
157-158, 164, 168, 171, 175, 177- 


financial crisis, 133 
gold dinar, 121 
government, 24, 144 
Malaysian Derivatives Exchange 
(MDEX), 145 
Mali, 50, 95 

margin call, 149 

marginal propensity to consume, 13, 


efficiency, 145 
interest rate, 53, 81, 108 
risk, 20 

materialism, 84, 167 
mathematical programming, 94 
matrix, 141 

medium of exchange, 26, 51, 67, 71 
101, 157 
Mexico, 23, 143 
Middle East, 46 
Mint, 105-106 
mismanagement, 38 
mispricing, 139 

aggregates, 102, 116, 123, 142 
instability, 59, 114 
meltdown, 60 
policies, 135 
sector, 12 
standard, 80 
base, 132 
capital, 132 
changer, 138 

creation, 4, 11, 13, 16, 23, 34, 45, 

77, 107, 116, 120, 130-131 
denominations of, 1 13 
destruction of, 26, 36, 77, 98, 107 
meltdowns, 108, 109 
stock, 60 

supply, 8, 11-12, 17, 20-21,27, 
75-77, 103, 107, 113-115, 123- 
125, 132-135 

monopoly, 35, 40, 75, 79, 111 
mortgage duration, 107 
multilateral, 79, 85, 88, 94-95, 99, 

101, 109-110, 116, 119, 157, 172 


The Theft of Nations — Returning to Gold 

Multilateral Payment Arrangements 
(MPAs), 87, 95 
multilateral trade, 51 
multiple deposit creation, 11, 12, 16, 
22, 29, 33,43, 59, 60, 102,115, 


Mundell, Robert A., 87 
murabaha, 58 
Murabitun, 3 

Muslim countries, 33, 164, 168, 174 


currency, 43, 48, 85, 97, 101, 105 
resources, 83 

nationalization of banks, 115 
necessities, 107 
negative interest rate, 69, 115 
neo-liberalization, 16, 24, 78, 84, 

nominal GDP, 123, 125 
non-Muslims, 54, 112, 168 
non-performing loans (NPL), 133 
Nor Mohamed Yakcop, 81, 87-88, 

numismatic value, 72, 103 

obsolescence, 97 

offshore ringgit transactions, 144 

oil reserves, 47 

Old Maid, 104 

OPEC, 46 

open market operations, 135 
oppression, 48, 50, 166-167, 174 
optimal debt level, 19 
options, 21, 95-96, 119, 145, 152- 

organized exchange, 147, 157 
Ottoman caliphate, 10, 26, 34, 74 
overdraft, 120 

paper money, 4, 6-8, 12, 17, 21, 25, 
67, 74, 89, 124 
patriotic politicians, 121 
pegging, currency, 43, 45 
Periodic Table of Elements, 161 
Persian silver' coin, 111 
Philadelphia Stock Exchange, 96, 

independence, 120 
variable, 130 

power, 23, 40, 102 
structure, 76 
turmoil, 76, 103 
will, 115, 121 
politics, 39 

pound sterling, 96, 120, 157 
poverty, 9, 15, 27, 76, 102 
precious metals, 49, 66, 109, 119^ 
171 / 

predators, 48, 119 / 

price / 

level, 8, 12, 80, 123, 124 
risk, 158 / / 

private - 

banking, 114 
sector debt, 21 
productivity, 13, 67 
property sector, 107 
Prophet Muhammad, 74, 81, 111 

expenditure, 18 
finance, 114 
money, 114 
sector, 17, 21 
servants, 114 

purchasing power, 29, 30, 68, 104, 
114,117, 168 
put option, 152, 155 



quantity theory of money, 125 

rate swaps, 55 
rating agencies, 19, 55 
raw material, 27, 37, 171 

capital, 50 
GDPs, 103 

money, 48, 60, 69, 78, 103, 114, 

Real Money Units (RMU) , 4, 70 
output, 8, 12, 123, 124 
sector, 11-13 
transactions, 44, 85 
wealth, 9, 21-22, 24-25, 35, 44, 
audit, 89, 105 
exchange rates, 88 
recession, 3, 27, 37, 76-77, 107 
religion, 39, 77-78, 83-84, 107, 165- 

religious groups, 121 
rescheduling of the loan, 17 
asset, 120 

requirement, 8, 11, 17, 24, 30-31, 
33, 58-59, 69, 114, 130, 133- 

resources, 23, 47, 50, 98 
restructure loans, 21 
retrenchments, 77 
return on equity, 19 
riba, 26, 117 
Ricardo, David, 94 
RMU see Real Money Units 
(RMU), 4, 70 
Roman Byzantine, 74, 111 
Roosevelt, Franklin D., 163 
rouble, 103, 108, 125 

Rowbotham, Michael, 16 
Jastram, Roy W., 80 
Royal Mint of Malaysia, 105, 121 
rupee, 144, 146-155, 157 
rupiah, 156-157, 168 
Russia, 23, 95, 163, 168 

Sachs, Goldman, 51 
salt, 66, 71 

savings, 6, 34, 40, 46-49, 95, 103, 
108-109, 111 
science, 83, 97 
seasonal trends, 19 
secular culture, 84 
seigniorage, 24, 29-33, 38, 41, 43-46, 
48-49, 59, 66, 76-78, 96, 98, 104, 
114, 120 

Shari’ah , 74, 84, 101 
currency, 74 
money, 101 
shells, 66, 72 
Shelton, Judy, 3 
Siam, 83 

silver, Ag, 49, 66, 70, 98, 109, 112, 

Singapore dollar, 137-141 
slavery, 24, 50, 83 
social structure, 83 
implications, 26 
problems, 15, 26, 59, 65, 69 
South Africa, 95, 143, 163 
South Korea, 39 
sovereign, 74 

sovereignty, 4, 13, 22-25, 30, 35, 
37-39, 46-47, 60, 65, 76-78, 81, 
83-84, 98, 107, 114, 117 
Soviet Union, 125 
Special Drawing Rights (SDR), 120 
specialization, 58, 66-67 


The Theft of Nations — Returning to Gold 

speculative profits, 37, 139 

spiritual, 84 


market, 148-149, 153 
transactions, 151, 160 
stable, 12,19, 70,72, 78, 80-81,97, 
99, 103, 108, 113, 119, 124, 158, 
167-168, 172, 173 
standards of living, 11-12, 83 
state money, 11, 22, 40, 102, 113- 
114, 133 

statutory reserve requirement 

(SRR), 120, 130 
Stiglitz, Joseph, 15 
store .of value, 68, 72, 108 
superpowers, 108 
sustainability, 12-13, 75, 78 
swapping, 57 

T-account, 130, 134 
tax deductibility, 18 

technology, 16, 79, 89, 97, 167 
TERRA, 3, 37, 70 
Thailand, 39, 143, 157 
theft of nations, 50, 61, 77, 118 
Third World, 15, 47 

balances and loans, reschedule, 
21, 98, 169 
deficits, 31, 46-47 
dinar, 88 

imbalance,'31, 92, 158 
matrix, 94 

transaction costs, 81, 96-97, 108, 
138-139, 159 
triangular arbitrage, 141 
Turkey, 23, 143 

U.S. Treasury, 51 
ufti, 83-84 
umrah, 111 

unified currency, 71, 97, 159 

unique risk, 97, 159 

unit of account, 68, 70, 79, 81, 92, 

94, 97, 110, 113 i 

unit trusts, 109 / 

United States, 3, 22-23 j 29-32, 36, 
46-47, 49-51, 60, 86( 96, 118, 145, 
163, 175 / 

unjustness, 59, 69, 117 
utility firms, 19 / 

variable rates, 55 

variation margin, 96, 149, 151, 156 

of circulation, 8, 12 
of money, 68, 124. 
volatility, 70, 80 

wars, 48, 83-84, 103 

economies, 22, 118 
poverty, 16 

World Bank, 15-16, 50, 118-119 
World WarH, 118 

Xerox, 22-23 

yen, 96, 120, 157 

zakat, 69, 111, 115-116 
zero-sum games, 44, 104 

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